Millennium Post

Modi government’s fiscal year challenges

The Narendra Modi-led government has entered the new fiscal year (2015-16) with relatively poor economic outcomes in its first ten months of governing this country. These poor outcomes make the desired growth rebound even more challenging, in the midst of domestic, global and geo-strategic uncertainties. For the astute Finance Minister Arun Jaitley, the world thinks India is “ready to fly”, but all the incoming data thus far and policy glitches (in tax and auctions) are giving rise to fresh misgivings among foreign investors, excessively relied upon for our redemption.

The tone of his Budget speech may have improved investor sentiment in its immediate aftermath but the community of foreign investors, joined by domestic corporates, are holding out for more decisive action on several fronts. Ease of business still remains a distant dream because the reforms process is a slow ongoing process; a process which may still be viewed as inadequate in the absence of reform measures.

It is true that India is set to become the fastest growing economy in this year or the next, as noted by international financial institutions, at a time of distinct slowdown in China, as it rebalances its economy, but China is still poised for more interest cuts to shore up growth at around 7 per cent in 2015 after 7.4 per cent in 2014, the slowest in 24 years.

The Modi Government has no doubt moved more forcefully on spectrum and coal auctions to mobilise substantial revenues for balancing the budget to targeted deficits (4.1 per cent in fiscal 15 and 3.9 per cent of GDP in fiscal 16) and also to transfer resources to coal-producing states.Despite its success in getting the Foreign Direct Investment-oriented insurance, coal and mining legislative measures enacted, in spite of difficulties in the opposition-dominant Rajya Sabha, the NDA Government is in a dilemma over the land acquisition bill which cannot be pushed likewise.

Prime Minister Modi, whose as yet undefined “development” model is palpably seen as more of a pro-corporate drive, has now to gain credibility among the farmers and rural poor. His Bharatiya Janata Party is now at work to re-make the Government’s image sullied by its determined bid to push land legislation at any cost. The stout resistance from a united opposition against what it dubs as “anti-farmer moves”, as well as the Prime Minister’s ambiguity on religious tolerance and failure to curb the Hindutva forces behind him, are now seen to erode earlier perceptions abroad of a strong government having taken over with in-built “political certainty” (for reforms at least).

Jaitley has been trying to talk up the economy. The Centre, however,  has  not managed to improve investor sentiment and lift market mood. He, however, realises that investors are yet to be convinced that India is well on the move for a fair, equitable and non-adversarial tax system, his Government’s stated top priority.

Nor have economic data of 2014-15 shown any steady improvement whether in industrial output, the core sectors, or exports. One area of welcome decline is inflation but Jaitley’s claim of bringing it about is not warranted because of the sharp fall in global oil and commodity prices. There has been both continuing fall in domestic savings with decline in deposit growth and demand in the economy as a result of high inflation. Food article prices like pulses are close to double-digit levels. Consumer Price Index (CPI) is again rising with February data at 5.37 per cent and food inflation at 6.79 per cent.

The two quick rate cuts of Reserve Bank of India (RBI) in January-March are yet to be transmitted by banks for borrowers as bank chiefs are still mulling over base lending rates, despite an excess of liquidity and proddings from the Government and the central bank on monetary policy transmission.
It is unlikely that RBI Governor Dr Raghuram Rajan would make a third cut so early when he comes up with the first monetary policy statement for the new fiscal year; on April 7.Indeed what is looked for are some clearer RBI projections of macro-economic trends and a likely trajectory of CPI, given its responsibility to contain inflation within the agreed range under the new monetary policy framework.

But the Government-RBI agreement on monetary policy still leaves some questions unanswered, especially the autonomy that the central bank has traditionally exercised, which is linked up with the composition of the Monetary Policy Committee on which the Government and RBI views differ..
There is too much work to be done by Jaitley for reviving growth at the budgeted 8 to 8.5 per cent-though IMF-World Bank-OECD-ADB estimates range from 7.5 to 7.8 per cent. He would no longer have supportive factors like fall in oil prices in fiscal 15 which helped him to cut fuel subsidies by deregulating diesel prices.

2015-16 may turn out to be more a transitional year for Government to get to grips with all the delayed projects, speeding up procedures required to derive gains from the coal auctions and facilitating revival of investments, public and private, and ensuring a steady growth path for manufacture. Return of confidence in economic recovery would depend on more positive trends in industrial output and corporate performance. Much would also depend on the outlook for the monsoon season in 2015. Many states have run into unseasonal rains damaging rabi crops. Lower farm output in 2014-15 is already pushing up food inflation.

Investment revival is a key requisite. Corporates, saddled with dollar debt, when the US currency is continually appreciating, are unlikely to play any significant role. Banks are weighed down by bad assets and are yet to work their way out of a muddle they created themselves.

In this situation, the Modi Government would do well to make more conciliatory approaches in its efforts to push the reform agenda. Further cuts in subsidies or labour market reform seem ruled out. A hopeful pointer is the smoothening of process for the launching of GST (Goods and Services Tax) from April 2016 - a key reform to be undertaken. IPA
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