The govt must spend its way out of trouble even if the deficit is breached; there’s no other way to kick-start growth
It might seem like the Modi government has lost the plot given how the land acquisition Bill hasn’t made much headway. The GST, too, given its present form (with the additional tax of 1% for two years to placate producing states), is threatening to become a party-pooper rather than a game-changer. And the retrospective MAT on foreign portfolio investors—the only ones willing to wait for the achhe din to arrive—was an altogether unforced error.
But if the government is looking for R40,000 crore to fix the country’s irrigation system—and there is no doubt the onus of spending this year is entirely on the government—it should, without worrying too much, spend. To be sure, there will be some consequences—the deficit will be breached, by some 35 basis points above the targetted 3.9%—and some constituencies will end up unhappy. But spending R30,000-35,000 crore more could just give growth that extra kick and push economy out of the trough that it is in. Given how much of the private sector is over-leveraged and, even otherwise, is not looking to borrow, it is unlikely an extra borrowing of R35,000 crore will crowd out private sector investment, the main reason why sticking to a fiscal target is so important.
Instead of irrigation though, the money might be better spent on resuscitating stalled projects valued at more than
R1.2 lakh crore in March, 2015; that will help generate cash flows sooner and help promoters repay loans. Where promoters don’t have the wherewithal to infuse more equity into projects or companies, they should be asked to step aside. Banks can’t be forced to work with promoters who are hugely indebted to them but aren’t able to repay the loans. With some special financial assistance from the government, banks must ease out weaker promoters—and use government funds to revive the projects—and sell the companies to stronger ones, whether foreign or local. A Posco, for instance, may well be interested in buying a couple of steel plants, many of which are in trouble—once the banks have infused more equity, or written off debt, the project will look more viable.
However, for these transactions to take place smoothly without ending up in the courts and running into years of litigation, banks are going to need a lot of political support. Promoters, no matter how bankrupt they are, aren’t going to give in easily and the law today is skewed in their favour. Which is why the government must demonstrate it is determined to work in the interest of the banking system and back lenders in their efforts to replace weak promoters with stronger ones. This will also be an opportunity for it to prove it is not favouring any particular business houses and shake off the ‘suit boot ki sarkar’ tag. In the process, cash will be freed up, banks will be a lot healthier and the economy will gain momentum.
Also, if banks are able to find new buyers for even a couple of the larger projects or companies, it will be a strong signal to the promoters that they need to do better than simply ask for their debt to be restructured. In fact, unless they are able to turn around a few companies by roping in new promoters, banks’ own balance-sheets are going to be in jeopardy; at the end of March 2015, restructured loans—a third of which could slip—stood at R2.86 lakh crore. Crisil has cautioned refinancing via the 5/25 scheme—extending the loan tenures for infra projects by charging a higher interest rate—would not just mask the true value of assets, a fair proportion of these assets could slip as well.
The government might believe it can raise resources from overseas to fund growth—and it probably can from countries like China and Japan—but there cannot be a substitute for a robust banking system; only when the banking system is lighter on bad loans can it get back to serious lending. If the Modi government wants programmes like Jan Dhan-Aadhaar-Mobile to succeed, it must get the banks out of the mess they are in.
The real estate sector, a good measure of consumer confidence, reflects the reality. Launches in cities like Mumbai are at five-year lows while inventories are at multi-year highs. With the exception of Bangalore, office space is going abegging in almost every city, while mall vacancies are as high as 40%. This has hurt the cash economy, which may be undesirable from the government’s point of view, but nevertheless helps businesses of all kinds. The reality is that industry isn’t enthused to invest because it doesn’t see demand picking up any time soon and there is plenty of spare capacity going anyway; even if consumption demand, now running at a 10-year low, revives, it could take a while for it to even revert to the mean. An economy low on both cash and confidence can’t get very far.