India Inc India Inc: Monday, 04 January 2016 08:45
Analysis

New Year to bring a fresh reformist outlook in India

There is a lot to look forward to this year. Equally, there are several areas of concern. How the Narendra Modi government handles these issues will determine if the economy does indeed move into a higher growth trajectory – and generate more jobs, more consumption and investment-led growth and greater all-round prosperity.

First, let’s look at the positives. Low global crude oil prices and the sustained slowdown in world commodity markets will continue to help the Indian fiscal situation. Since the country is a net commodity importer, unlike, say, Brazil and Russia, lower global prices will help keep the fiscal deficit, current account deficit, inflation and the subsidy bill in control.

This will also give Finance Minister Arun Jaitley enough elbow room to continue with his strategy of front loading public investment in infrastructure, especially roads & highways, railways and rural infrastructure, to kick start the investment cycle, especially as the private sectors seems unable or unwilling to make large scale fresh investments.

In this context, the performance of the roads & highways sector, under the guidance of Nitin Gadkari, is pushing the envelope, stepping up fresh investments and hastening the pace of development with innovative fiscal and administrative incentives.

But there is a limit to the government’s ability to keep pushing up public investment. The private sector has to step in sometime soon. But several large companies are struggling with up to 30 per cent overcapacity, overleveraged balance sheets and tepid consumer demand. This is seriously impacting their ability to make fresh investments in green field and brown field expansions.

On a positive note, passenger car demand has been showing sustained growth after a long period of lull and consumer goods are showing signs of coming out of a long period of slowdown. In this context, the increase in salaries, allowances and pensions to more than 10 million existing and former central government employees proposed by the Seventh Pay Commission, will take effect this month.

This could provide a huge stimulus to the economy, especially to the automobile, consumer goods, education, travel and discretionary spend sectors and, to a lesser extent, to the real estate sector. Policy planners and analysts are hoping that the expected jump in demand – and its multiplier effect – could add billions of dollars to economic output and bump up the growth rate from its current 7.0-7.5 per cent levels to more than 8 per cent. In the light of empirical evidence, this seems a reasonable expectation. How this plays out in the coming months could determine the trajectory of the national economy in the years to come.

The power sector is another bright spot in the economy. The Uday initiative, in particular, is expected to clean up the books of the loss-making state electricity boards, which provide critical last-mile connectivity in many parts of India. This will ensure that every unit of power produced is purchased and paid for, ensuring the health of the country’s power sector.

Then, the Reserve Bank of India’s diktat to banks to clear up their balance sheets in a time-bound manner promises some short-term pain for both the banks and industry but could pave the way for a healthier economy and sustained growth in the years ahead.

In this context, the pick-up in demand, especially in the power sector, will bring down the level of non-performing assets in the banking sector.

Jaitley, Gadkari and other ministers in charge of economic ministries have assured that reforms by executive action will continue and, in fact, will gather pace in the months to come. The government has moved fast on the ease of doing business and steps taken during 2015 and the steps expected this year are expected to lead to a further jump in India’s current ranking from 130 out of 189 countries (itself an improvement of 12 places over the previous year) and push rapid industrialisation and job creation.

The start-up eco-system in the country – already the world’s third largest – is expected to get a push when the Prime Minister announces a special initiative for this vital segment on January 16.

However, the fate of the Goods & Service Tax Bill, the bankruptcy bill, the real estate bill and several other reforms-oriented legislations remains an open question. Though senior ministers are optimistic about their passage during the Budget session of Parliament, the stand of the opposition Congress, which has stalled the passage of these legislations in the Rajya Sabha, where the government is in a woeful minority, does not seem to have changed.

Past experience suggests that governments are at their reformist best in the first half of their terms, with electoral considerations diluting their zest for economic liberalisation as they near the end of their terms. Thus, 2016 could offer the Modi government the last opportunity to embark on radical and transformational reforms. The irrational exuberance and expectations raised by the 2014 Lok Sabha elections that brought Modi to power have ebbed substantially. This could provide the government just the right platform to redeem its pledge to the Indian people.

by Arnab Mitra

Arnab Mitra is a senior journalist based in Delhi. He writes on business and politics.

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