With less than six months to go for the general elections, the Modi-led Government has entered the last phase of its innings — what in cricket parlance is popularly known as the “slog overs”.
Given the recent adverse outcome for the BJP-led government in the Assembly polls in five States, one will not be surprised if some heavy hitting (with more economic reforms being pushed) is pursued in the next few months to give the much needed ‘feel good factor’ for the economy.
A golden opportunity exists to push free-market reforms in the critical areas of land and labour, which have been constraining economic growth. There is very little to show for the current regime on these two fronts in the last four years, despite some promises in the run up to 2014 elections.
On the agriculture front, there is still need for some big ticket reforms to help farmers get a better price for their produce. Despite robust production, there are demand side constraints, which have put a lid on improved pricing.
With interest rates in the US on the rise, foreign portfolio investors have begun moving their funds out of India. Even FDI — which had witnessed copious flows in the last few years — may play the waiting game till the outcome of the general elections is known. Many foreign investors are on a wait and watch mode. But the foreign private equity and venture capital funds are quite bullish on India and continue to take big bets on new age enterprises like fintechs and online food delivery. However, it remains to be seen if 2019 will see some big ticket deals like the Walmart-Flipkart transaction that concluded this year.
Re-energise financial system
There is no doubt that the economy — which was administered the bitter medicine of demonetisation and GST over last two years — has rebounded to some normalcy.
However, what is now most required is a set of measures to “re-energise” the financial system, especially the public sector banks, which even today account for 70 per cent of banking assets. For an economy that is recording an average growth of 7-8 per cent, a broad measure is that credit/advances in the financial system should grow 2.5x, which is clearly not happening. Though some green shoots were seen on this front with credit pick in the last two months — mainly due to private sector banks.
Unless the bad loan mess in state-owned banks are squarely addressed, the economy can forget getting itself catapulted to double digit growth, say economy watchers. In the last four years, Modi-led Government has pumped in about ₹2.5 lakh crore capital in public sector banks, largely without any short-term benefits. Only time will tell if this is a case of throwing taxpayers’ good money after bad.
Of course, the enactment of bankruptcy law — a key achievement of Modi Government that has been overshadowed by the troubles in public sector banks — is helping the banks, albeit slowly, in climbing out of the bad loan crisis. The recent Government move to infuse ₹41,000-crore additional capital in PSBs is a timely move, but how much of this goes to the credit-starved MSME sector is the key. On their part, the home grown private banks too have not covered themselves with glory, given their poor track record on NPA recognition and corporate governance practices.
War of nerves
If there was one development that roiled the Indian financial markets in 2017 in a big way, it was the public skirmish between Finance Ministry and the RBI. Of course, with a new RBI Governor at the helm, one may see a decent burial in 2019 to the points of contention between North Block and the Mint Street. Don’t be surprised if the prompt corrective action (PCA) rules are tweaked in 2019 to enable many of the existing lenders (those 11 banks under PCA) to take up lending once again.
One thing that is coming out clearly is that Government is not averse to bank consolidation even if it means deepening of HR problems in the banking system. Big banks are welcome and for a country that touts itself as the world’s fastest growing large economy, not having a bank in the top rankings global industry league table was a matter of concern. So whether it be consolidation of SBI associate banks with SBI or the proposed amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank, the Centre has taken the right approach keeping the long term interests in mind.
If there is one area where India fares badly vis-a-vis the developed world, it is in area of addressing board failures (corporate governance). The recent IL&FS blowout and IDBI Bank crisis are good examples of poor oversight/governance. These incidents clearly shatter the widely held myth of strong correlation between size and quality of governance. It is here that India needs to get its act right, especially in building the institution of independent directors. Defining director independence in monetary terms will not do and policy makers should realise this. There are governance issues not only with the corporate sector, but also the country’s central bank — an aspect that Finance Ministry is very keen to address in 2019.
The good news for the Modi-led Government is that direct taxes have seen robust growth, thanks to demonetisation. With increased formalisation of economy and the taxman’s aggressive approach to clamp out black money, the income tax base has almost doubled in last two years. Now that the GST data is being shared with the Income Tax Department, one can only see more robust growth in direct taxes collections in the upcoming fiscal. A better compliance regime in GST will help bolster revenues, although the system is still riddled with complexities and keeping life tough for MSMEs.
With the global crude oil prices softening in the recent weeks, there is good chance the Government will comfortably meet the fiscal targets for the current fiscal. But GST revenue mop-up may fall short of the budgeted levels.