Prime Minister Narendra Modi needs to take a leaf out of the books of central bankers worldwide; after the drubbing in Bihar elections that his part received, he and his team now need to be more far more accommodative or accommodating than ever before. A rapprochement with Opposition parties will make life easier for the NDA government in Parliament and with more new legislation—changes in labour laws or real estate regulations—in place, Indian industry will begin to feel the government means business. Equally important, finance minister Arun Jaitley must ensure the tax regime is a friendly one; so far he has merely said the regime will be non-adversarial, the reality on the ground has been quite different. Else, whatever chance India has of cashing in on its advantages at a time when the global growth is slowing would have been frittered away.
Many of the reforms, however, will have an impact only in the longer term. In the meantime Jaitley needs to come up with plan to fix the economy: three things he can do immdiately are spend more than planned, privatise some state-owned firms and push the GST by altogether scrapping the 1% additional levy. These don’t need much doing really but can have a big impact.
Else he runs the risk of growth decelerating; already GDP grew at just 7.1% in Q1FY16 from 7.5% in Q4FY15 and high frequency indicators don’t point to a sustained recovery. Corporate results and accompanying commentary for the September quarter should come as a wake up call for the government; for a sample of 1,308 companies, net profits have stayed flat in the three months to September and the management of Larsen and Toubro has dropped its guidance for order inflows to an increase of 5-7% from 15% earlier.
Which is why there’s little point in merely trying to achieve spending targets; in the absence of meaningful investments by the private sector, that’s not going to be able to give the economy the push that it needs. Total spends between April and September were Rs 9.1 lakh crore or 51.2% of the estimate; this needs to be increased especially what’s called Plan capital expenditure—which stood at Rs 82,818 crore in the six months to September.
Even if revenue collections are estimated to fall short by about Rs 50,000 crore and disinvestments by about Rs 30,000 crore it can draw on its surpluses with the Reserve Bank of India—-Rs 1.6 lakh crore— sell SUUTI shares or quickly do some privatisation. Exceeding the targetted deficit might dent the government’s reputation with global rating agencies but the finance minister will score more than brownie points at home because the economy will be back on its feet. In fact, the government may not even need to borrow more from the bond markets to fund expenses.
Investments, especially in infrastructure, alone can pull the economy out the trough; without it there’s unlikely to any sustained pick-up in consumption demand, no matter how much interest rates may fall because ultimately it’s consumer confidence that matters. To be sure a revision in pay scales of government employees, once the 7th Pay Commission recommendations are implemented, might boost consumption but even that could be temporary. Gross fixed capital formation has fallen to 27.8% in Q1FY16 from 29.2% in Q4FY15 and unless the government spends more this isn’t likely to improve.