Space for prudent
policy contracting
S.Narendra
What is the
present state
of the Indian
economy? Well,
the nature of
response to this
question depends upon who is being
asked.
In October, finance minister Arun
jaitley held a special press conference
primarily to rebut the BJP's ex-ministers,
Yashwant Sinha and Arun Shourie, who
had gone public with charges of
mishandling of the economy. He
debunked critics by stating that the
fundamentals of the Indian economy
were very sound, an expression one had
heard often from his predecessor
Chidambaram.
Yashwant Sinha
This over used funda hides more
than what it reveals. Anyway, according to
Jaitley, 'sound fundamentals' had helped
the economy to achieve an average of 7.5
per cent growth rate during the NDA's 3
year rule. Quoting the IMF, the finance
minister had said that India was one of
the fastest growing economies globally and set to achieve 8.2 per cent growth
next year.
To make this more impressive, he also
compared the growth during the NDA
with that achieved during the UPA.
However, he failed to mention the
declining crude oil prices that had helped
the government finances, as well as his
unwillingness to pass on the low oil price
benefit to the consumer. In fact, Jaitley
has imposed over 100 per cent levy on
POL that has gone to cushion his budget.
No finance minister acknowledges the
contribution of external factors like low
crude prices or international liquidity to
their management of the economy.
Arun Jaitley
Relying on 'economic fundamentals',
the government is aiming to boost
growth with massive public spending on
infrastructure-roads, housing, power,
railways and digital infrastructure. Its
other plank is to bail out banks burdened
with huge bad debts through infusion of
tax payer money into them. He hoped
that such infusion would enable them to
lend more for private investment. The
presumption here is that the private
sector, that is mainly responsible for PSU banks' humongous bad debts, will
develop the necessary appetite for fresh
borrowing and investment.
Arun Shourie
He was also confident of moving on
fiscal consolidation, meaning that the
budget deficit reduction target (3.2 per
cent) will be met. It was claimed that the
average inflation was coming down - to 2
per cent (July 2016-July 17),and Importexport
gap was narrowing. Jaitley further
asserted that the adverse impact both of
demonetisation and GST implementation
was temporary and it was tapering off.
When it came to public investment,
some mind-boggling numbers were
mentioned. It was said that both
government and PSE capex spending this
year would be about Rs 7 lakh crore, out
of which a major share had already been
spent; in a big push for road construction,
it proposes to invest over Rs 7 lakh crore
for building 83 000 kms road to be
completed by 2022, with the promise of
generating 14 crore man days of
employment.
P Chidambaram
While that was the official narrative,
the November economic statistics
showed a spike in consumer inflation and
IIP or industrial growth dropped to a
three-month low of 2.24 per cent. Even
the RBI has flagged inflation as a big
concern. The IMF and other international
bodies, while identifying India as a fastest
growing economy, and noting the NDA
government's thrust to economic
reforms and improving ease of doing
business, voice quite a few concerns.
Among them, the benefit Indian
economy received from low oil prices
during the past three years may not be
available for long.
This December international crude
price has risen to $65 per barrel. Trade
protection replacing free international
trade has become the trend, mostly led
by Trump's USA in pursuit of his "America
First' policy. The tightening of American
visa policy has already impacted the
Indian IT sector, a major exporter of
services.
The critics of government handling of
the economy reckon that both
demonetisation and 'hasty', hiccupy implementation of GST had disrupted the
economic momentum and are
responsible for wiping out the livelihood
of farmers and people engaged in
informal sectors. Former RBI governor,
Dr. Y. V. Reddy, recently stated that 'their
short term impact' was not so short.
Narendra Modi
A bigger concern is 'sluggishness in
employment', flagged in the official
Economist Survey. It also had said that
permanent jobs are being replaced by
low wage, temporary work. While
campaigning for Lok Sabha polls,
Narendra Modi had promised to create
one crore jobs. Not only the number of
jobs generated in the economy so far is
lower than before, but demonetisation
had wiped out 1.5 million millions jobs
between January-April, according to CMIE
report. The benefit of whatever growth
occurring is flowing more into the top
one per cent of people, exacerbating the
already worsening income inequality.
Latest statistics show that top one per
cent of population controls 53 per cent of
national wealth. A major concern voiced
is that private sector investment
prospects are very low, as this sector is
bogged down by heavy debt. The
government's attempt to make up for
lack of private investment is laudable, the
funds will have to come from more public
debt and other creative financial
instruments like projects linked bonds.
There is both concern and scepticism
about this prospect.
The credit rating agency S&P signalling
its less than enthusiastic assessment of
India's capacity for sustaining more debt, has not changed the country's sovereign
(credit) rating from BBB-;on the other
hand, another less reliable Moody's has
upgraded India's rating.
Dr. Y. V. Reddy
Another agency Fitch noting that the
growth (quarter to quarter) was weaker
than expected, has cut the growth rate
expectation for current year to 6.7 per
cent from earlier 6.9 per cent. For next
year also Fitch forecasts 7.3 per cent as
against the previous 7.4 per cent.The
divergence in assessments clearly shows
that India is headed for uncertain gains.
Looking ahead into the new year, one
can only expect to witness more
acrimonious debate on the economic
prospects. it is a pre-general election year,
punctuated with eight state assembly
elections, including in the BJP ruled MP.
Chattisgarh and Rajasthan. Both the
Union and relevant state governments
could be expected to opt for populist
spending and fancy sops to impress
voters.
Even before its February 2018 budget,
the Centre has committed to fiscal
expansionary stance. Trade bodies are
expecting rationalization (concessions) of
GST. That means spend more than your
means, carving a big hole in the future
budgets. Significantly, the government
has announced that it would soon unveil
an employment policy. One does not
know whether it is a prelude to
introducing some form of UBI- or
universal basic income. The Economic
Survey had forwarded this idea. All in all
the next 12 months will see more
contentious politics, reducing the room
for prudent economic policies.