Nirmala Sitharaman is new Finance Minister: Nirmala Sitharaman, the first woman to head the coveted finance ministry full time, is no stranger to North Block. Sitharaman, who had held the defence, commerce and industry portfolios in the past, was briefly appointed a minister of state in the finance ministry under Arun Jaitley in the first term of the Narendra Modi government. She had also been the country’s first full-time woman defence minister (former Prime Minister Indira Gandhi was the first woman to hold additional portfolio of defence and finance at different periods). But as she starts a fresh innings as the finance minister after Jaitley opted out of the Cabinet citing ill health, Sitharaman faces daunting challenges.
Also Read: Nirmala Sitharaman’s tweets show new finance minister knows her economy and pickles
Economic growth is decelerating (from 8.2% in FY17 to a five-year low of 6.8% in FY19) and private consumption, a key driver of it in recent years, is facing both cyclical and structural risks. Private investments are hard to come by and the government’s ability to boost capital expenditure is constrained further, thanks to higher revenue expenditure following the launch of schemes like PM-Kisan (It alone will cost Rs 87,000 crore in FY20). Farm distress persists and unemployment rate touched a 45-year high in 2017-18.
A brewing liquidity crisis in the shadow-banking space has flared up with the IL&FS default. Solvency concerns have hit NBFCs, many of which (such as DHFL) are struggling to roll over their repayment obligations. Although banks’ bad loan ratio is expected to have dropped for the first time in nearly a decade in FY19, it might still be in double digits. Non-food credit growth has slumped by around a half from an annual average of 22% in the decade under the UPA, although it has improved since last year.
Several high-profile insolvency cases — including Essar Steel and Bhushan Power and Steel — are languishing in courts for months, delaying the flow of funds to banks. Jet Airways, with debt in excess of `11,000 crore, has gone belly up and is waiting for potential investors to rescue it. The Modi government’s push for easier and greater credit flow to MSMEs and farmers has analysts warn of the next bad loan crisis emanating from these segments.
Disinvestment of debt-laden Air India hasn’t taken off and strategic sell-off of two dozen public-sector units (PSUs), proposed by Niti Aayog, has remained a non-starter. In the absence of private investors, state entities have been roped in to pick up the government’s stakes in other PSUs (LIC has acquired a majority stake in IDBI Bank and ONGC has bought into HPCL).
The rupee is still ruling at close to 70 to a dollar, oil prices remain sticky and foreign portfolio investors — who had turned net sellers in equities in 2018 — have been volatile. FDI in equities fell for the first time in six years in FY19 and export growth has remained far below potential, suggesting growing risks to the country’s current account.
While demonetisation has helped expand the tax base, its effect on tax revenue growth has been less pronounced. The improvement in tax buoyancy seen in the immediate aftermath of the note ban and GST could not be sustained as the crackdown on suspect cash deposits during the demonetisation period turned out to be rather ineffective. Last fiscal see huge shortfall of about `1.5 lakh crore in GST revenue compared with the budget estimate.
The task of meeting the fiscal deficit target of 3% of GDP has already been deferred by two years to FY21, although the government wants to trim the debt to the targetted 40% of GDP by FY25 from 46.5% in FY18. This means spending will have to be kept under tight leash.
Prior to taking over as the finance minister, Sitharaman was the defence minister, firefighting the Opposition’s onslaught on the government over the Rafale deal. Before that, she was the minister of state (independent charge) for commerce and industry for over three years until her elevation to the defence ministry in September 2017. During this stint, she watched over a jump in FDI inflows — 25% in FY15, 23% in FY16 and 8% in FY17.
The government announced two big rounds of relaxations in the FDI regime, first in November 2015 and then in June 2016, easing rules in over a dozen sectors ranging from real estate, pharmaceuticals, food marketing, aviation, defence to e-commerce and banking. However, exports contracted by more than 1% in FY15 and 15% in FY16 before recording a 5% rise in 2016-17.
