Time is running out, reforms can’t wait

Dark clouds roll in and the heavens open up. That is the fear of people living in low-lying areas. The fear of the known and unknown and the devastation that flash floods can do in the blink of an eye. Ever since the GDP print of 5.7 per cent has come in, panic has gripped policy mavens and perceptions about the nation’s economic wellbeing have changed dramatically. Intense debate too has been thrown into stark relief after Yashwant Sinha decided to go public with his prognosis for a failing economy. Since then it has been seen that the classic childhood tale of Sher Aaya, Sher Aaya being reprised almost daily. With very little fiscal manoeuvrability available and a constant needle watch by ratings agencies on following prudent financial discipline norms, the scope, size and requirement of the stimulus package have been questioned. It is another matter that India has received only a single upgrade from the same agencies over the last 25 years, which means that the debate remains wide open.

However, the prospects of a rate cut (today) have been dampened by the August CPI inflation print of 3.4 per cent, which surprised on the upside. Indeed, with inflation expected to rise closer towards the RBI’s inflation target, most analysts do not think there is much room to ease monetary policy further. Moreover, the potential fiscal easing would have to be evaluated in the context of its impact on inflation.

As private capital expenditure (capex) remains relatively subdued, it has been suggested that further easing (in the form of lower rates) will help boost growth. However, in this regard, the RBI has taken the view that actions to resolve the banking system’s non-performing loans will be key to fostering the recovery in capex and credit demand areas as opposed to further rate cuts. This was most recently emphasised by the governor in the last MPC minutes, where he noted: “Resolution of stressed balance sheets of banks, therefore, will remain important for reviving credit demand and the investment cycle.”

With the RBI rightly obsessed with inflation watching and targeting, it is incumbent on the government to jump-start growth using executive powers vested in it.

October is normally a gangbusters month as far as Foreign Institutional Investors (FII) buying is concerned, barring 2016, if you look at empirical data for the last decade, they have remained net buyers. After three months of relentless selling by FPIs, many market participants are hoping for a revival in buying. After net sales in equity of $3.1 billion in July and August followed by further selling amounting to `11,000 crores in equities in September, the market is hopeful of a turnaround. Historically, the seasonality of October reviving market sentiment is proven. Dips have provided buying opportunities and perhaps this will act as a catalyst in the short term. Actually, the market in the immediate past — say the last seven trading sessions, leaving out Tuesday — the talk of a stimulus package has cracked the market wide open. It was believed that the PM would take the final call on the economic stimulus, but absolutely nothing has been forthcoming to pump prime the activity. Instead of that we have the constitution of an economic advisory council, which will interface with the PM directly, making chief economic adviser Arvind Subramanian somewhat redundant.

For most part, the lack of action on any sort of structural reform is what is impeding this government’s progress. The absence of an economic charter and agenda on the part of the BJP, which seems to be an extension counter for the UPA’s economic policies, is another let-down. Nobody begrudges what this government or the previous dispensation did or is doing for the underprivileged and poor. India resides in its villages and we have to come to terms with this inescapable fact. They need to be uplifted from remaining downtrodden, caught as they are in a time warp of poverty and woeful living conditions. A right-wing political formation practising welfare economics is an anachronism, but a reality of 2014-17. Nehru’s Fabian socialism gave way to Indira Gandhi’s Soviet-style socialism, which was followed by perestroika initiated by Rajiv Gandhi and P.V. Narasimha Rao’s full-blown unfettering of the command economy. Atal Behari Vajpayee came like a breath of fresh air to take economic momentum forward. In many ways, UPA-1 benefited from Vajpayeeji’s policies to register skyscraper-like numbers for GDP growth. The arrogance of UPA-2 comforted by 206 seats built on the edifice of a farm loan waiver meant that left-of-centre economic policies became the new boilerplate. A strong underpinning of corruption brought them down in a cataclysmic election in 2014. Since then, one is waiting for a higher growth plane, but uncharacteristic apologists to a left-wing model have meant that the momentum has never come through. A revision in GDP numbers to the extent of 200 basis points means that actual print could be 3.7 per cent rather than 5.7 per cent.

The cumulative gross fiscal deficit (GFD) for the Centre reached 96 per cent of FY18 BE levels in August 2017 versus 76 per cent of BE during the same time in FY17. An early Budget and consequent front-loading of expenditure (44 per cent of BE vs 40 per cent last year), coupled with relatively slower revenue growth has precipitated into a fiscal deficit of `5.25 trillion (3.1 per cent GDP) vs `4.08 trillion (2.7 per cent of GDP) in FY17. While capex growth precedes that of revenue expenditure, overall spending is largely directed towards defence, food and public distribution and rural development. FYTD, market borrowings financed 58 per cent of the GFD, followed by disinvestment of surplus cash (24 per cent). Although the government has deferred the decision to increase market borrowings until December 2017, the finances of the Centre remain vulnerable owing to: a) unaccounted higher allowances costs under the 7th Pay Commission; b) lower RBI dividend; c) expected lower telecom revenues, which are likely to raise GFD by 40 basis points. In addition to these pressures, uncertainty in: a) GST revenues; b) divestment receipts; and c) GDP growth place the Centre’s finances in an uncomfortable position.

Equally, the absence of executive authority to deepen and widen reform of any sort is perhaps the greatest concern. At this moment the delta is of an ever-weakening economy. Just when the economy was rebounding with the consumption theme returning sometime last October, the twin blows of demonetisation and then an under-prepared GST has debilitated the economy. All metrics are sadly reflecting the poor macros and micros resulting from demand destruction due to demonetisation. The convergence of the formal and informal economy due to the same experiment is causing enormous pain. The sheer inability to make a directional move from socialist moorings means that job creation has come to a standstill.

Commerce is the modern axis; everything revolves around it. Deep-rooted dogmas have to be consigned to the ashes of history. We need to get a move on, time has run out. Populism is good, but don’t forget India also has a vast multitude of youth and a strong middle class residing in urban agglomerates, they too seek alleviation, they too form a big chunk of the aspirational class, which needs deliverance.