During the first year of its tenure, Modi – government focused on filling the pot holes in a dilapidated economy left over by a decade of mis-governance and policy paralysis under erstwhile UPA – regime. More importantly, it laid the foundation for putting India on an accelerated growth trajectory. For details, pl read:-
Continuing its relentless drive to take things forward in every area [not letting even minute things go off the hook and ensuring full synergy with macro thrust on ‘development’ and ‘good governance’], Team Modi has kept up the momentum during the current fiscal.
One clearly sees some green shoots particularly in critical areas like core industries, public investment and fiscal deficit [all 3 most vulnerable spots hitherto]. Indeed, these reinforce our confidence that now India is not only well on its way to high growth path but it also has resilience to weather any storm be it from outside [Greece exit from eurozone or oil prices rising] or from within [monsoon playing truant and surge in food prices].
The most redeeming feature of current year’s performance so far is rebound in growth of core sector. In May, 2015, output of eight core industries increased by 4.4% over May, 2014. This is highest in the past six months and augurs well for overall industrial growth. The coal sector registered a spectacular growth of 7.8% in May, 2015 on year-on-year basis. This is truly extraordinary considering that 81% of coal production comes from Coal India Limited (CIL) – a government undertaking. It demonstrates how given the will and zeal to execute, even a company like CIL infamous for its inefficiencies and corruption can be made to deliver.
Second, despite its overarching compulsion to rein in fiscal deficit and remain glued to the fiscal consolidation road map [reaching 3% target by 2017-18], the government has taken on to itself prime responsibility of kick starting investment. Thus, plan expenditure which is taken as a good proxy for capital spending, has reached 13.4% of budget allocation by end May, 2015. The corresponding figure for 2014 was significantly lower at 10.4%.
In contrast, the non-plan expenditure which includes wages & salaries, pension, interest payments, subsidies, defence etc [this is considered to be un-productive and there is little to gain by way of boost to growth] up to end May, 2015 was 15.3% of budget estimate down from 18.1% for the corresponding period of 2014. This is a clear manifestation of Modi’s intent to conserve money for spending in areas where there is potential for growth.
Critics argue that saving in non-plan expenditure especially subsidies is fortuitous mainly because of drop in the international price of oil. To a certain extent, this is true. But, we must not underestimate the effect of major policy reforms implemented by Modi – dispensation.
Thus, the historic decision to decontrol diesel from November 1, 2014 was followed by successful re-launch of direct benefit transfer (DBT) of LPG subsidy [this was quietly buried by UPA in January, 2014 after working on it barely for 6 months on a very limited scale]. Now, the government is goading people – through a massive media blitzkrieg and awareness campaign – to voluntarily surrender this subsidy. During current year, it will also bring kerosene subsidy under the ambit of DBT.
Third, thanks to subsidy reforms and prudent expenditure management, trajectory of fiscal deficit is also a matter of great comfort. Last year, deficit at the end of May, 2014 stood at 45% of budget estimate. During current year, this is down to 37.5%. Although, this still leaves scope for further cut [on a pro rata basis, this should not have been more than 1/6th of annual deficit], this is a significant improvement over last year.
Fourth, collection of indirect taxes [customs, excise and service tax] during first 2 months of current fiscal increased by around 39% over corresponding period last year and this was spread across all sectors. The increase in excise collections by 88% in particular is a clear sign of revival in manufacturing activity. The trend will accelerate as government’s efforts to unclog stalled projects have started yielding results.
Thus, the value of stalled projects during the quarter ending June, 2015 was around Rs 80,000 crores down by a steep 60% from Rs 200,000 crores in the corresponding quarter of last year. Further, projects worth Rs 100,000 crores were commissioned during June, 2015 quarter on top of projects worth Rs 370,000 crores commissioned during 2014-15 [10 months of last year were under Modi – government].
There has also been fresh impetus to investment activity in the current year. Thus, new investment announcements worth Rs 115,000 crores were made during quarter ending June, 2015. This is a significant jump of 33% over quarter ending June, 2014. 498 new investment proposals were made during April – June, 2015 as against much lower number announced during April – June, 2014.
The current scenario presents a pleasant contrast with past wherein, the government is leading the show via boost to its capital spend and enthusing private sector to invest through policy reforms and ease of doing business. However, for now corporate sector especially companies in power, roads, highways and steel etc is hamstrung by weak balance sheets. The situation is compounded by increasing non-performing assets [NPAs] of public sector banks [PSBs].
The aforementioned situation has arisen primarily because of the brazen manner in which projects were handed out to promoters well connected with political establishment – without proper planning and assessment of their viability – and equally brazen manner in which PSBs were asked to give loans to them without conducting due diligence. The net result is projects are bleeding and with them even the banks are bleeding.
This indeed has impaired the ability of government to impart the desired momentum to the economy. Due to high stressed assets [NPAs plus restructured loans] of PSBs in the range of 12-15% and stringent provisioning requirements imposed by RBI, they are not able to increase credit to required extent. At the same time, the option of forcing existing promoters to exit is riddled with several legal and practical hurdles.
Nonetheless, Modi – government is pulling all stops to address this challenge as well. In this regard, even as it prepares a road map for sweeping reforms of PSBs for grant of full autonomy [zero tolerance for political interference in their working], for now it is seriously considering their re-capitalization based on rigorous criteria [during current year, it intends to infuse around Rs 20,000 crores, double the budget allocation] so that growth is not hampered.
In short, with policy and governance reforms firmly in place, credible success in resurrecting the investment cycle, green shoots especially in core sector, deft handling of budget receipts and expenditure [to keep fiscal deficit on track] and resilience to absorb external shocks, Indian economy is poised for second excellent year under Modi inching closer to 8% GDP growth.