Growth needs a strong revival

Finance Minister Arun Jaitley got his Finance Bill, giving effect to this year’s budget proposals, through the Lok Sabha, but not before he had to roll-back some of them. In addition to these steps, the Centre  has  extended some sops to foreign institutional investors. One step forward and two steps back is not an uncommon trend, especially when it comes to Indian governments. 

Following a concerted push back against the Finance Ministry’s plans to strip the Reserve Bank of its authority to regulate the government bond market and manage public debt, the Finance Minister it seems has relented. The Finance Bill, being a money Bill, goes to the Rajya Sabha, but does not require its approval for passage. The new provision, which has now been withdrawn, was designed to take away RBI jurisdiction over the debt market. Some financial experts argue that it should not have been included in the Finance Bill, in the first place. This particular proposal became a fresh source of friction between the Government and the RBI. The Finance Ministry now says that a new road-map would be prepared, in consultation with the RBI.

This has to be done through legislation, as the opposition pointed out. In the two months since the presentation of Jaitley’s much-touted reform budget, there are not many signs of any significant turnaround for the economy. This is perplexing because Jaitley did not have to worry about seeking the approval of the Rajya Sabha, where his government does not have the numbers. The Finance Bill, being a money Bill, goes to the Rajya Sabha, but does not require its approval for passage. In other words, Jaitley could have remained firm in his convictions, as far as this proposal was concerned.

Apart from macroeconomic management issues, new strains have also emerged with past tax claims (MAT) slapped on FIIs, who turned jittery and cautious about new equity purchases after some sell-offs. The stock market has mostly been bearish during April.  The Government has made it clear that the abolition of MAT in the budget would only be prospective from April 1, 2015 and past dues have to be made good. 

FIIs and the Centre have, however, agreed on seeking the fast-tracking of disputes raised over the tax. The matter is now before the Supreme Court. Meanwhile, Jaitley has provided in the Finance Bill that there would be no levy of MAT on foreign portfolio investors parking funds in bonds, private equity funds as well  as MNCs earning royalty, that face levies which are lower than the 20 percent MAT. This will be applicable from the current fiscal year. The Finance Minister has also eased MAT rules for real estate and infrastructure investment trusts. 

The macroeconomic scene is no less challenging than it was a year ago.  In terms of sectoral performances 2014/15 has turned out to be no better than the previous year under the UPA. Take any of the key variables: manufacturing, core sector industries, exports, credit growth, corporate performance, all are uniformly dismal. 

Jaitley’s tasks are thus cut out, outside the arena of reform legislation, notably GST, in bringing into fruition at least those projects which have been cleared from all angles. These projects, however, lack fresh funding. Bottlenecks surrounding the need for multiple clearances for various projects remain, despite the government’s claims that it has expedited a large number of them. 

But most of these are stalled for funding from banks which are themselves stressed with rising bad loans (NPAs). These had arisen with initially-lended projects, mainly infrastructure, not taking off due to the absence of fuel linkage or environment clearance and in some cases land acquisition. It may be facile for Prime Minister Narendra Modi or Jaitley to blame it all on 2013 land acquisition law, which is now sought to be drastically amended through ordinances.  But, after the country-wide farmer agitation, will the Modi Government bite the proverbial bullet? 

The growth outlook for the current year is not as promising as expected. This is not only because of the political challenges that the Modi Government has run into over its own land acquisition bill. There are greater concerns about its ability to put through reforms to bridge infrastructure gaps with public and private investments and making India globally competitive. 

The World Bank in its most recent report on India notes that growth has accelerated (going by the revised CSO data for 2014/15), inflation has declined, the current account deficit has narrowed, and external reserves have increased. GDP growth (at market prices) is projected at 7.2 percent in fiscal 2015 and 7.5 percent in 2015-16. But all this is subject to both external and domestic risks. 

The country is likely to experience a less than robust monsoon this year and it would not only retard growth significantly but add to the rural distress and reverse the declining trend in consumer price inflation. The government has no doubt been taking steps to meet any contingency. Externally, how long India would continue to benefit from low oil prices, which had a substantial impact on the economy in 2014/15, remains an uncertainty. A tightening of US monetary policy can also pose a disruptive impact on India’s exchange rate and financial markets, according to the World Bank which says, despite reserve build-up (340 billion dollars by mid-April) the risk warrants vigilance. 

The US Fed has for the present deferred a rate increase till the latter part of the year in view of mixed signs that US economy exhibit, with growth slowing to 0.2 percent in the first quarter of 2015. Global growth overall will remain constrained by the lack of vigour in the economic recovery in advanced economies, especially the USA, China and India’s other trade partners. India has announced its most ambitious goals and reform measures but, as the Bank points out, boosting private investment would be crucial to overcome the infrastructure deficit.  But the debt overhang in corporate balance sheets, which is also applicable to public sector banks, would be a major problem. 

The government hardly looks fiscally comfortable as of now to undertake recapitalization of the requisite magnitude, even if some measures are under way to strengthen the balance sheets of public sector banks. 

Despite all the attractions of investment opportunities India holds out, as made widely known in the Prime Minister’s visits abroad, the international community still looks for tangible progress on sustainable reforms on making it easier to do business as well as domestic corporate investment revival. Likewise, international rating agencies also stipulate favourable factors to emerge before they could do a credit upgrade, sought by India.