The Stuttering, Sputtering Economy

After demonetisation of old Rs 500 and Rs 1,000 notes on November 8, 2016, the economy had slowed down. The implementation of the Goods and Services Tax on July 1 last year compounded the crisis. In the run-up to the 2019 Lok Sabha elections the Modi government has to ensure that the economic growth picks up to 7.5-8 per cent range. Union finance minister Arun Jaitley has the hard task ahead in the budget to be presented on February 1, writes G SRINIVASAN

The euphoria with which Narendra Modi cruised to victory on the crest of popular backing for his promise to run a clean, efficient administration with a pellucid mantra of “minimum government and maximum governance” in the 2014 General Elections seems to be dwindling fast with hardly 17 months left before the nation goes to the 2019 polls. The economic scorecard during the last four years including the current one which closes on March 31, 2018 does not look alluring for all the tall promises made to herald “achhe din” for all, albeit being able to provide relatively scam-free governance by the Modi sarkar. Even as the domestic economy was limping back to normalcy after the back-to-back droughts of two years, 2014-16, the NDA government headed by the formidable BJP leader Modi peremptorily demonetised high denominational notes of Rs 500 and Rs 1,000 on November 8, 2016, the third year of being in office. The fallout of this dramatic and ill-planned strategy with massive dislocation to the highly cashdependent economy, particularly in the agrarian and informal sectors, was harrowing enough to hollow out activities in the real sectors of the economy. This coupled with the rapid-fire action to put in place in what is dubbed “a good and simple tax with one nation, one market, one tax” in the form of the Goods and Services Tax (GST) effective from July 1 last year compounded the crisis the economy is beset with.
No doubt, the introduction of the GST, after a protracted period of parleys stretching to several years, is a vital piece of reform that promises to be a moneyspinner and a means to lift the very low productivity feature of the high-cost Indian economy that has been held hostage to a multiple rate of taxes. With too many thresholds, multiple rates raising classification problems with attendant large-scale lobbying to get one included in the smaller bands and perfunctory preparation for the rollout sans addressing the underlying concerns of 29 states, two Union Territories with legislatures and the Union government meant the wobbly start to a major reform. Former RBI governor and ex-chairman of the Economic Advisory Council to the PM and a distinguished fiscal expert M Govinda Rao together argued in a monograph that it might be desirable to fix the threshold at Rs 50 lakh. By doing so, they said the revenue loss would be minimal but ease of doing business would be high. Presently, taxpayers with aggregate turnover of up to Rs 20 lakh in a financial year are not subject to pay GST, whereas for special category of states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Sikkim, Tripura, Himachal Pradesh and Uttarakhand (except Jammu & Kashmir for which the limit is up to Rs 20 lakh), the threshold limit is up to Rs 10 lakh. When within India, a pan-India single tax fosters this discriminatory treatment to geographically distant states without concern for really poor states like Bihar, Rajasthan, Uttar Pradesh and even Madhya Pradesh which deserve a leg-up in the form of freedom to entrepreneurs to get exempt from payout of the GST, there is a merit in the case espousing the upper threshold to Rs 50 lakh as eminently practical. In such a dispensation, the putative loss is negligible besides reducing the compliance cost to the large swathe of small businesses sans much adverse repercussions on revenue, analysts wryly say.

When within India, a pan-India single tax fosters this discriminatory treatment to geographically distant states without concern for really poor states

Considering the constraints being bravely put up with by trade and industry which range from the problem of payment, filing the returns and claiming input tax credit to the woes of exporters who had been faced with liquidity issues as the zerorating of the tax has not worked and refunds have been unduly delayed for months on end, the GST Council must perforce have to deem the step-changes it is asked to make by the stakeholders always a work in progress. Credit must be given to the GST Council headed by Union finance minister Arun Jaitley for being quite responsive and responsible to the concerns up till now by tweaking the structure and operational obstacles to render it simpler.
While the GST reform after factoring in successfully surmounting the extant problems with which it is confronted would do well to raise India’s hope for moving into a faster growth gear in the medium term, the short-term outlook for the economy does not look anything but rosy. Having been bitten by an aggressive Congress campaign by the scion of Nehru dynasty with which Modi has no love lost, the NDA government is to contend with fighting as many as eight state elections this year and early 2019, before it takes a plunge into the national campaign for retaining power at the Centre in 2019 elections. Some of the major BJP states include Rajasthan and Madhya Pradesh, while in Karnataka it has to wrest power from Congress! Come hell or high water, the BJP ought to demonstrate its mesmeric spell with electorate once again and it is a personal or presidential form of prestige at stake for Prime Minister Modi who singlehandedly carried the party today to its pinnacle where it is ruling in as many as 19 states, a spell with which Jawaharlal Nehru once bound the nation!
In order to retain the lustre and allure of his party, Modi has the hard task to ensure that the economic growth picks up to 7.5-8 per cent range, inflation does not get out of control and the triple balance sheet woes of the banks, corporate firms and the economy (fiscal deficit) do not worsen further! It is a difficult work to do but any rash strategy as the one NDA did such as arbitrary policy changes as demonetization would dash remnant of hope for revival of economic activities in the real sectors of the economy.

In order to retain the lustre and allure of his party, Prime Minister Modi has the hard task to ensure that the economic growth picks up to 7.5-8 per cent range

In the second quarter of 2017-18, no doubt, GDP growth was 6.3 per cent, which the authorities construed as a start of the recovery phase, after slowdown in previous quarters. But July-September 2017 has been the slowest second quarter yet logged in the new series of National Accounts Statistics (NAS) data (base year 2011-12), i.e., the slowest since 2012-13. Given the observed trends sans a very few exceptions that the economy tends to grow at a higher pace during the second quarter, usually higher by one percentage point in the new series of the NAS, the annual growth rate of the current year would be no more than 6.3 per cent. This would be far lower than 7.1 per cent in 2016-17 as per the advance estimates and 8 per cent in 2015-16 as per provisional estimates! Gross fixed capital formation (GFCF), in common parlance for investment, as a percentage of GDP has plummeted from 36.6 per cent in the second quarter of 2011-12 to 28.8 per cent in the second quarter of 2017-18. Despite government ramping up public investment budget after budget, the investment climate as a whole for companies to invest or stay invested has been very lackadaisical because the ease of doing business for trade and industry continues to be unfriendly or not hassle-free. No wonder, the minutes of the RBI Monetary Policy Committee (MPC) conceded that growth in private consumption expenditure – the mainstay of aggregate demand – slowed to an eight-quarter low in the second quarter this fiscal. It is further assessed by the MPC that inflation is estimated in the range of 4.3-4.7 per cent for the third and fourth quarter!

With inflation demon likely to rear its head on the back of spurt in crude oil prices and other raw material prices, the room for loosening fiscal policy space is narrow


The government has earned a sort of reprieve for the time being as there was a barrage of criticism about the little-read provisions of the Financial Resolution and Deposit Insurance (FRDI) Bill that threatens to play fast and loose with the nest egg savings of the depositors in commercial banks. However, the ruling party bought time and truce when the House Panel headed by its Rajya Sabha member Bhupender Yadav was given extension by Lok Sabha Speaker Sumitra Mahajan on the opening day of the winter session to present its report on the last day of the budget session in 2018!
Some of the dreadful provisions in the proposed FRDI Bill provoked the silent resentment of depositors in the bank accounts of small savings and fixed deposits (FDs) as they do not constitute any organised lobby to hoot or get their problem solved. The bill that is primarily designed to provide “a comprehensive resolution framework for specified financial sector entities” including commercial banks which got overexposed to liberal lending and landed themselves with a doughty drag of non-performing assets (NPAs). In banking parlance, assets meant that the loans extended to productive sectors to carry on their operational expenses including investment which earn a reasonable rate of return for the banks! It is altogether a different but dismal tale that the borrowers always complain about the high cost of money from the financial intermediaries that stymie their operations and render the country a high-cost economy. That is why there were howls of snarls and resentment whenever the monetary policy of the central bank failed to cut the prime lending rates with which ordinary borrowers access the funds of banks. Minister of state for finance Shiv Pratap Shukla said in a written reply in the Lok Sabha on December 22 that gross NPAs of scheduled commercial banks were Rs 7,33,974 crore as on end-September 2017. NPAs of private sector banks as on the same date amounted to Rs 1,02,808 crore from Rs 33,690 crore as on end-March 2015.
The FRDI Bill, among others, envisages the setting up of a Resolution Corporation (RC), which is purported to provide for the resolution of certain categories of financial service providers in distress, deposit insurance to the depositors of an insured service provider up to a specified limit; and protection of public funds, for ensuring the stability and resilience of the financial system. It is also made clear that setting up of the RC is predicated on the passing of the FRDI Bill by Parliament. The proposed RC would monitor financial firms such as banks, insurance companies, stock exchanges and payment systems to detect early signals of impairment rather than letting it get festered to the point where there is a perilous risk of contagion to the entire financial landscape. Financial entities such as banks and insurance firms take deposits and get premiums from a large section of retail investors including retired people who park their meagre savings in banks’ FDs. These are the categories of people who could not band themselves as creditors in any controversy as they are a disparate and desperate lot.
When banks set off the bankruptcy process against the borrowers to whom they had lent out of the deposit money of millions of retail savers the latter are the worst affected since the defaulting borrowers plead insolvency and the bank had to take what is elliptically dubbed “hair-cuts”! Thus in a bankruptcy of a bank, depositors would be the worst hit in the process by paying through their nose for a run-down asset of the borrower! This is in spite of the extant insurance ceiling of Rs 1 lakh only, even if one holds multiple accounts in a variety of forms including small savings and FDs and the rest of the depositors’ money could be used for bailing in the banks on the brink of a collapse because of their overwhelming burden of the NPAs. Official information reveals that savings and deposits parked with banks are now well over Rs 100 lakh crore.
What disturbs the legions of small depositors is a provision in the proposed FRDI Bill empowering the Resolution Corporation to “bailin” a financial entity such as banks! A ‘bail-in’ entails salvaging a bank on the brink of failure by making its creditors and depositors take a loss on their holdings! It is the diametric opposite of a “bail-out” which entails the rescue of a financial body (bank) by external agencies, typically governments, using taxpayers’ money. Thus instead of government going to the rescue operation of a failing bank or any other financial entity by infusing capital, depositors’ funds parked in banks at insubstantial returns to them are being proposed to be availed of for this purpose. There is not much difference in both the approaches because in the earlier one of government taking the tab of a failing bank only taxpayers’ money is utilised and in the latter proposed clause a specific constituency of deposit holders in banks would be flailed for the wanton ills of the banks. In essence, the cost of rescue is socialised even when in good times the profits earned by these financial firms are cornered by a few!
The proposed clause in the FRDI Bill follows the decisions of many western governments after the financial meltdown of 2008 to severely circumscribe the use of taxpayers’ money in a bid to bail out banks in future but to dip into depositors’ money with them! In November 2011, the leaders of the G-20 of which India is also a member assented to a key feature of an effective and efficacious financial resolution regime for financial entities as an international standard with bail-in as the principal clause. Following this development, as a responsible initial member of G-20 India has had to take action and the Financial Sector Legislative Reforms Commission in 2012-13 did concede that eliminating all failures of financial institutions is “neither feasible nor desirable” as such failure “is an integral part of the regenerative processes of the market economies”. In 2014, the Financial Stability and Development Council-mandated Working Group headed by a former finance secretary Arvind Mayaram and RBI deputy governor Anand Sinha suggested the setting up of a resolution regime for tackling the failure of weak banks and financial entities in which the losses would be absorbed by shareholders and unsecured creditors.
Interestingly, a former deputy governor of the RBI, Usha Thorat, writing in a national daily unequivocally maintained that the FSDC Group had suggested that the bail-in clause should exclude bank deposits, even as this clause might incorporate other types of unsecured liabilities such as bonds and commercial papers. With no less a person than the Prime Minister Modi reassuring the public that their deposits in banks would be protected, the proof of the promise must get translated into the exclusion of this livelihood-threatening clause of millions of people before long.

With inflation demon likely to rear its head on the back of spurt in crude oil prices and other raw material prices, the room for loosening fiscal policy space is narrow to the government as it is firmly committed to staying in the path of fiscal consolidation. As it is, the country’s fiscal deficit touched around 96 per cent of the budget estimates of 2017-18 in the first seven months itself, even as the authorities are making the boldest claim of instituting measures to “mobilise higher amount of resources from tax, non-tax and non-debt capital receipts” (read disinvestment) “to balance the gap between expenditure and resources and to achieve the fiscal deficit target” as set in the budget. This will be a tall order, given the electoral compulsions manifest in forthcoming state assembly polls as also to unveil a soft penultimate budget to earn the goodwill of voters by throwing them goodies! How Mr Jaitley will resolve the conundrum of keeping expenses under check while providing relief packages to various constituencies of the real sectors of the economy would be clearer only on February 1, 2018 as he rises to present the General Budget in Parliament.