Finance Minister Arun Jaitley said India needs to find a balance between fiscal prudence and spending -- and there’s no need to panic -- as he tries to dig the economy out of its deepest slump in three years.
Finance Minister Arun Jaitley said India needs to find a balance between fiscal prudence and spending — and there’s no need to panic — as he tries to dig the economy out of its deepest slump in three years. Speaking at the Bloomberg Economic Forum in Mumbai, Jaitley called for more private investment from local companies and said the banking system must get healthier to support that investment. “How do you maintain the balancing act between continuing to spend in an economy, continue to maintain your banks and support them, and how do you maintain standard of fiscal prudence?” Jaitley said. “And this is the challenge we are facing.” Speculation had been swirling about a stimulus to revive Asia’s No. 3 economy that’s bogged down by sweeping currency and tax-policy changes. With elections a little more than a year away, pressure has been building on Prime Minister Narendra Modi to spur investment and create jobs for the swelling workforce. The problem is that U.S. tightening and rising global oil prices make it tougher for India to spend more.
Investors are awaiting details on what the government will do, said Sonal Varma, chief India economist at Nomura Holdings Inc. “Fiscal slippage has been a risk, but whether actual slippage occurs is dependent upon whether the government prioritizes fiscal credibility or faster growth,” she said. India aims to shrink its budget deficit to 3.2 percent of gross domestic product in the year through March 2018 from 3.5 percent the previous year. Jaitley declined to provide details on the government’s plans to spur growth.
Indian bond yields jumped and the rupee fell on Thursday on concern that the government will forfeit its goal to shrink Asia’s widest budget deficit. The federal shortfall was at 92 percent of the full-year target in the first four months of the fiscal year started April 1 compared with 74 percent in the previous year. “It’s not about expenditure, it’s about the quality of expenditure,” said Amitabh Kant, an adviser to the government. Citing leaky airport toilets and loss-making highways, he urged the government to sell large infrastructure projects and called on companies to expand into the global market.
Any deterioration in public finances risks the wrath of rating companies such as S&P Global Ratings, which this week downgraded China for the first time since 1999 citing soaring debt. India carries the lowest investment grade rating and a cut to junk status could force some investors to dispose their Indian assets. “We are all conscious of the fact that there is importance of the kind of fiscal prudence that is required in the economy,” Jaitley said. “At the same time we are also conscious of the need in such situations of spending and obviously the real answer lies in finding the balance between the two.”
The government’s revenue may be threatened in the coming months by a new goods and services tax, implemented July 1. The reform — one of India’s biggest since the economy opened to foreigners in 1991 — was a win for Jaitley and promises to unite India’s 1.3 billion people into a massive common market. However, early hiccups include confusion about the method of filing receipts and the multi-layered tax structure, which contrasts with a single rate in most countries. Businessmen are also claiming hefty tax credits, which could drain government finances. Jaitley needs to ride out these risks before the GST can deliver on its promise to get more Indians to pay their taxes in the years ahead.
The roll out of the GST was smoother than anticipated and revenue of states will rise going forward, Jaitley said. “I was keeping my fingers crossed that there wouldn’t be huge chaos,” Jaitley said. “I expected major technology glitches.” The government is also studying concerns of exporters around the new levy.
Jaitley needs funds to inject fresh capital into India’s struggling banks. The lenders are sitting on $191 billion of souring debt that’s raising questions about their chances of survival. Under-provisioned banks are also unwilling to lend more, which means investment by private companies may shrink this year. Jaitley has said he expected strong banks to take over weaker ones especially in the state-run sector. Earlier this year, the government gave the Reserve Bank of India greater powers to go after defaulters and recover loans through a new bankruptcy code.
“We are looking at both consolidation and strengthening,” Jaitley said, without providing a timeline. Jaitley has the right policy idea, but we must give the new system time, said Shanti Ekambaran, president of consumer banking at Kotak Mahindra Bank Ltd. If the policy works as planned “it will have far reaching” impacts on the banking system, she said.
To bridge the gap between revenue and expenditure, Jaitley has budgeted 725 billion rupees ($11 billion) from stake sales in state-run companies and listing of insurance companies. The on-going attempt to sell Air India could set the tone on how successful he’ll be. The national carrier’s balance sheet includes real estate from Tokyo to London, two hotels, five subsidiary companies and a joint venture, making a possible sale complicated. IndiGo, India’s biggest commercial airline, said in June it was willing to buy Air India’s international operations, or even the entire airline business, while travel and aviation firm Bird Group is among companies that have shown interest in bidding for the carrier’s ground handling business.
Air India’s allure will depend on the government’s ability to write off nearly half of the $8 billion debt that’s not backed by assets. India will determine bidding terms once it has a better sense of the market and the universe of bidders, Jaitley said. “Always remember that privatization is the art of the possible,” he said. “Therefore it is an exercise which has to be transparent, it has to be acceptable to a cross section of political and public opinion, it is an exercise that must result in a better performance.”