Let me wish all the readers a very happy, healthy and a prosperous 2018! This is going to be yet another challenging year from the viewpoint of calibrating economic policies and as the government has only a short period window to restore the economy to its health, hopefully, it will be packed with policy actions. The lessons from the Gujarat elections have shown the need to address the issue of farm distress. Unless proper policy framework is put in place and some visible progress is made, the promise of doubling farm incomes by 2022 made in the 2016 budget will come to haunt in the general elections. The county needs to create a million new jobs every month to take care of the addition to the workforce and migration of workforce from the farm sector. With children in the age group of 0-14 constituting 40% of the population, there is much that needs to be done to secure their future. The immediate task is to revive the investment climate which has been badly bruised on account of both structural factors such as the twin balance-sheet crisis and transitory factors like disruptions caused by demonetisation and suboptimal design and implementation of GST. While assertions, denials and slogans can help in the short term, policy reforms become imperative when the people are confronted with hard facts. The forthcoming budget, which will be presented by the finance minister on February 1, will be the last full year budget by this government before the general elections. Indeed, policies can be announced and implemented throughout the year. Besides, policy making in several areas are in the states’ domain, and the Union government can play only a limited role. Nevertheless, the Union budgets serve as important signalling events and must be taken seriously. With eight state elections due in 2018 and the general elections scheduled in 2019, the government faces a formidable challenge—of providing long-term policy direction—and yet, given the small window, it is imperative.
There are a number of positive developments which should create the base for further reforms in 2018. The recent Financial Stability Report of the Reserve Bank has underlined the fact that the number and cost of stalled projects have both declined in September last year as compared to March. The report also talks about the efforts to improve the quality of government expenditure. The improvement in the ease of doing business index put out by the World Bank, the recent upgrade by the Moody’s and the announcement of recapitalisation of public sector banks are other positives on which the government will have to build the policy reforms. At the same time, elevated risk to the banking sector has continued to persist and even worsen. The gross non-performing assets (GNPAs) of the scheduled commercial banks (SCBs) as a ratio of their advances has risen from 10.2% in March 2017 to 10.8% in September, and the corresponding increase for the public sector banks is from 13.5% to 16.2%. RBI’s stress tests show that under a baseline scenario, GNPA of SCBs is likely to increase to 10.8% in March 2018 and 11.1% in September 2018. The report also shows that while the GSPAs have increased, the share of large borrowers (above `5 crore) has declined and this probably indicates adverse impact of demonetisation on small businesses. Of course, the full impact of demonetisation and GST introduction will become clearer when the second advanced estimate of GDP for FY18 is put out early this year.
The election in Gujarat has underlined the need for interventions to mitigate the farm distress. The solution to the farmers’ problems does not lie not in loan waivers, expanding subsidies and transfers or continuing with ad hoc policies of banning exports or forcing imports. They lie instead in making investments in the farm sector and ensuring stable prices and ensuring input supplies. A lot of problems in the farm sector arise from wide fluctuations in the prices of farm produce. The “cobweb cycles” in farm products have continued to cause distress to farmers, and government interventions have been ineffective in dealing with them. Solutions such as periodic procurements or changing administered prices have not helped. What is needed is augmenting storage and marketing infrastructure, reforms in marketing and of investments in processing and encouraging exports. Reforms in food and fertilizer subsidy have been long overdue, but no government has mustered enough political courage to challenge the status quo.
The biggest elephant in the room that needs to be addressed is the poor investment climate in the country. Despite India’s improved showing in the World Bank’s index of ease of doing business, actual investments on the ground continue to be sluggish and the slide in gross domestic capital formation has continued in the second quarter of 2017-18 even as the GDP growth showed a reversal from the declining trend. Hopefully with much of the uncertainties regarding demonetisation behind and with attempts to ease the problems of GST implementation in a responsive manner, investment should see revival in the coming year. However, sustained revival of investment climate will depend on how speedily and effectively the National Company Law Tribunal (NCLT) will resolve the cases of bad loans referred to it. The process has just started and may gather steam during the course of the year. There are still considerable uncertainties on issues like haircut the lenders are willing to take and bidding by the promoters and some of them may actually end up in courts stalling the process. Nevertheless, hopefully, there will be some progress in resolving the twin balance-sheet crisis.
The possibility of slippage in adhering to the fiscal deficit target now is real. The government has already reached the volume of fiscal deficit for the whole year in November itself. Although there will be a considerable amount of jugglery in terms to postponement of payments and advance collections of taxes as pointed out by the CAG is its recent report for 2016-17, slippage seems to be real. The shortfall in tax collections could be as high as `50,000 crore and the government has realised only a half of the dividends from RBI and state-owned banks. There has been a shortfall in spectrum fees as well. The government has already announced additional borrowing of `50,000 crore and the markets have taken that into account in enhancing the bond yields. It is not the question of slippage of the target by 20 or 30 basis points. What is at stake is the credibility of the government. Perhaps, the time is opportune for creating a fiscal council to monitor the calibration of rule-based policy, but it should be appointed by, and report to, Parliament, and not the ministry of finance.