Focus back on the economy please

It is fair to suggest that the Bharatiya Janata Party (BJP) has suffered an embarrassing defeat at the hands of the Grand Alliance. With the Bihar elections coming to a close, the BJP-led Centre must now turn its attention back on to the economy, leaving behind divisive issues in the cupboard. To begin with, the current ruling dispensation at the Centre must build on some of the recent positives in the economy. The spurt in the indirect tax revenue and the Reserve Bank of India’s double-step on interest rates reflects not only buoyancy in revenue, but also a growing confidence that inflation is under control. Growing revenues allow the Centre some leeway for increasing expenditure, without crossing into the red. However, the recent spurt in pulse prices indicates that there is some way to go before the Centre, in partnership with State governments, brings food inflation under control. Suffice to say, food prices in India continue to succumb to the dangers of supply-side bottlenecks. Besides pulse prices, the other negatives continue to stack up. Both exports and imports remain in a state of decline. The manufacturing sector remains in the doldrums, reflecting a weak state of recovery. 

Although quarterly corporate results have shown a minimal rise in profits, total recovery remains a bridge too far due to global commodity price trends. A deficient monsoon will also see a sharp reduction in rural demand for a range of consumer products that include tractors and motorcycles, among others. More than anything else, public sector banks remain in a critical state, with burgeoning non-performing assets. 

The ultimate consequence of such a banking crisis is that access to credit suffering a serious downturn. Experts, however, argue that the worst may still be ahead. Although the Centre chalked out its strategy for public sector banks for ten months, there has been little or no progress. Four public sector banks — Indian Bank, UCO Bank, Andhra Bank, and Bharatiya Mahila Bank — are functioning without a Chief Executive Office and Managing Director. It was approximately 16 months ago that the PJ Nayak Committee submitted its report on reforms in public sector banks called “Governance of Boards of Banks in India”. As a consequence of the report, in August 2015, the government announced MDs for five PSU banks and a seven-point framework called “Indradhanush” to tackle the crisis. In a recent report, the global credit agency Moody’s slightly upgraded the outlook on India’s banking sector.  Moody’s rates 15 banks in India, four of which are of the private sector. Despite the mild thumbs up, public sector banks in India remain under stress by bad loans, particularly from the infrastructure sector, especially in the last four years. Private Banks, however, are on a much firmer ground.

This is not to suggest that the government has not tried to tackle difficult economic issues. Key policy announcements on dealing with a new civil aviation policy, a draft of the bankruptcy law and the financial mess that has taken a grip of the power sector, have been made.  In a note of dissent, the new civil aviation policy attempts to establish the need for price control or a cross-subsidy in what is essentially an ultra-competitive market. It is hard to gauge the logic behind that policy initiative. As far as road and rail projects are concerned, the Centre has taken a definitive initiative to reform these sectors. However, one is yet to witness measurable action on the ground. The Prime Minister’s bid to introduce clean energy to the country recently received a shot in the arm after key private sector players quoted surprisingly low prices for the supply of solar power. For both the citizen and the corporate sector, the promised simplification the tax comes as a massive relief. Tax administration, tough, remains a critical concern, with serious structural reforms required from the Centre’s side.  

The Goods and Services Tax (GST) Bill, for example, is stuck in the Rajya Sabha. It is considered to be the most important tax reforms since Independence. Intended to subsume many of the central and state indirect taxes, the GST is expected to transform the tax structure in the country. Unfortunately, the bill contains provisions such as the imposition of an additional tax (not to exceed 1 per cent) on the supply of goods in the course of inter-state trade or commerce collected by the Centre. Such an additional tax shall be assigned to the States for two years, or as recommended by the GST Council. 

This tax on inter-state commerce directly contradicts everything the GST stands for. Such a confused tax code will not only hurt the industry’s competitive position in the local markets but also affect it in global markets too. After the resounding defeat in Bihar, the Centre will have no choice but to reach out to the Opposition, and end its aggressive stance of the past. However, it is incumbent on an emboldened Opposition not to stall the Parliament and stall the reform process. Key economic reforms need to be discussed thoroughly before they are passed. The time for purposive politics has arrived. The BJP and its adversaries must catch that train and leave religion behind for the time being.