2014, the year of historic electoral success for the Narendra Modi-led BJP, with background support from its myriad saffron affiliates, has ended with the cautious forewarning that the Modi effect could run out of puff if the economy is not fixed expediently. The state of the economy is hardly any better now, than during last December’s new-year festivities. No amount of talking up seems to help. Manifestly, nothing less than deep structural changes will spawn a recovery, given that the economy’s potential growth rate has fallen disconcertingly since 2007-08.
The UPA government, especially during the last leg of its tenure, was at the receiving end of a torrent of adverse commentary, including from global rating agencies and Corporate India, usually modest in criticising incumbent governments. Modi has so far managed to escape a bad press. Corporate India pins a lot of hope on his regime and the analyst community has been empathetic too. The rating agencies that commended his decisive leadership style would bide their time before turning critical.
Yet, Modi and his finance minister Arun Jaitley haven’t pioneered any salvaging theme for the economy. To be fair, they may not even need to, if the right ones among available prescriptions are followed promptly and surely. Of course, luck has favoured both — the sharp fall in global oil.
(Brent crude oil price has dropped by almost a half in 2014) and farm commodity prices has come to aid government finances considerably. The high interest rates sustained by a strong-willed Reserve Bank of India (RBI) lured foreign institutional investors, who kept pouring money into India’s debt markets for most part of the past year (Net FII inflows in 2014 were $42.4 billion, three and a half times that in the previous year). This and Modi euphoria enabled capital markets to report major gains in 2014. The country’s forex reserves have scaled up to $329 billion now from a level of $296 billion at the same time a year ago — despite the current account deficit widening from 1.7% of GDP in FY14 to 2.1% in the second quarter of this year– due to sustained, high net FII inflows through the year.
Subdued revenue buoyancy and inadequate market appetite for PSUs being disinvested, however, signals the quality of fiscal consolidation is going to be heavily compromised. Jaitley will have to bend over backward to stick to this year’s “challenging” fiscal deficit target of 4.1% of the GDP, a legacy he inherited but chose not to redefine. The finance minister will have to cut productive spending hugely much like his predecessor P Chidambaram did, especially in his last term, given that items like salaries, pensions, interest payments are not amenable to Jaitley’s plans.
Despite the fall in commodity prices, some reduction in the FCI’s grain stocks and moderation in MSP hikes, the food and fertiliser subsidy
obligations remain highly onerous, owing in part to the huge roll overs from the previous years.
How wise is for Jaitley to show the Centre’s 2014-15 fiscal deficit artificially contained at 4.1%? Does he need to consider adherence to an impossible target by disingenuous means as the primary yardstick of his performance or exhibit visionary zeal and ask that he be judged for his
full term?
A high budget deficit theoretically could crowd out private investments and stoke inflation. But, as the finance ministry’s mid-year economic analysis report highlighted, as a consequence of the “over-exuberant (private) investment,” especially in Public Private Partnership (PPP) projects over some recent-past years, more than one-third firms have an interest coverage ratio of less than one, with the median debt-equity ratio at 70% amongst the highest in the world. The banking sector is also also hit by this stock problem that is weighing down corporate profits and hence investment, and is compounded by weak institutional structure to address the issue. Jaitley would therefore do well to take the advice and address “the neglect of public investment in the recent past and review medium-term fiscal policy to find the fiscal space for it.” The scope for massive increase in government’s capital expenditure in physical and social infrastructure is immense, given that the Centre’s capital spending budgeted for this fiscal is a dismal 1.8% of the GDP, while revenue expenditure, seen at 12.2%, can be curbed substantially by closing loss-making ventures, stopping fruitless schemes, augmenting pension reforms and rationalising subsidies with the help of the direct-benefit-transfer project.
Since revenue buoyancy will accompany growth rather than precede it, Jaitley could look at unconventional ways to mobilise resources like monetising the huge (unused) land assets with government and its arms like
Port Trusts, PSUs and defence wings. If he wants to show a good record by the time this government’s term ends, he can’t wait any longer and requires to complete a good part of this resource-raising in 2015 itself. If prime lands become private property, those would also drive businesses and create more revenue for the government, in addition to the initial capital receipts.
The Modi regime has embarked on productivity-enhancing reforms like easing of labour markets by prompting familial state governments, moving fast on the GST and ending public-sector monopoly in the coal sector despite political hurdles. It has also somewhat eased the norms for land acquisition. States now have a larger say in how to use their resources. These apart, the government must dismantle monopolies in certain sectors (For instance, spurring competition in petrochemicals could drive employment-intensive downstream industries like textiles and plastics), give more solid support to SMEs and start-ups by making available capital and easing rules, and expedite reforms in agricultural marketing. Putting in place a credible and professionally managed system to address industrial sickness and bankruptcy will help redeploy resources efficiently.
Compared to end-2013, the current global economic situation is less ominous to India. Although the diminished global demand for goods is problem on the export front, as the mid-year analysis report pointed out, “at the current conjuncture, the gradual reversion to normal monetary policy in the US is less of a threat to India.”
Ingenuous-but-relevant slogans – Clean India, bank-accounts-for-all, Make-in-India, Digital India and the like– and their dextrous marketing has so far stood Modi in good stead. So has his continuous communication with the people, even circumventing the mainstream Media and bridging the rural-urban divide that had long characterized Indian polity. The question is how adroitly Team Modi can harness its political and intellectual resources to bring about the improvement in governance and implementation India badly needs to re-invent the productive capacity of its economy and take it back to 8% plus growth.