Deeply wounded economy needs more than band-aid

The much-awaited July-September economic growth numbers are due later this month. The world’s fastest-growing major economy is feared to be slipping behind China again. All major data points are pointing towards that. It also seems that India is moving into a larger fiscal muddle than what the government would like us to believe.

Late last week, Moody’s expressed its pessimism over the state of India’s economic outlook. Though Moody’s cutting India’s credit outlook may not appear very serious to the government, which has taken cover under IMF and World Bank’s prognosis about the country’s economy, which is relatively optimistic. What may be of serious consequence is the commentary that the rating agency has offered. Without mincing words, it has said, one, the prospects of further reforms have diminished and, two, if nominal GDP growth does not return to high rates, the government’s debt and deficits will be difficult to manage.

The government may have hurriedly countered the rating agency’s estimates without giving proper thought. But Moody’s is not alone in flagging debt and deficit concerns. It is joined by independent economists, former Reserve Bank of India governors and even the current Finance Commission. They have been warning the government against piece-meal solutions to a larger economic problem and taking decisions only in the backdrop of crises. Former RBI Governor and a dominant voice on India’s macroeconomy, Raghuram Rajan last week said again that the economic growth will not come only from the tinkering of rates. India needs a new generation of reforms.

Band-aid measures

The Centre has announced at least 45 “reforms” after the July Union Budget for 2019-20 and it claims at least 15 have been implemented. However, a number of economists and analysts that DH spoke to, refused to call them reforms. They were only band-aid measures, at most, taken after each crisis hit the ground. For example, recently the RBI said it is working on amending the cooperative bank act, following the outbreak of a scam at Punjab and Maharashtra Cooperative Bank. In fact, according to an RTI query, in 2015, the RBI had pointed out to certain discrepancies in lending by the PMC Bank. It had warned about its cash credit limits not being reviewed annually. Still, it took five years for the regulator to decide on amending the concerned Act, at a time when lakhs of depositors are staring at losing crores of rupees.

Next, the measures announced for the real estate sector and a whopping fund in which LIC and SBI have been dragged as rescuers, came too late. They were amended after being rolled out n September. But, they are still far from ameliorating the woes of either the developers or the home buyers.

Now, there are murmurs that if pressure builds on the government, some of the norms like ‘positive net worth’ clause from those who are eligible to access funds from a newly created corpus of Rs 25,000 crore will be amended further.

Real estate honchos suggest that a large number of projects will remain stalled if the clause is not removed. The real estate sector was not adequately addressed in the Budget presented by Finance Minister Nirmala Sithraman and the measures announced last week are far from being realistic.

The sector is suffering from a severe cash crunch because its major lender – the NBFCs -- has almost collapsed. It needs long-time support from the government, which assures more investment in the sector – both from equity and debt side on a low cost. India’s public sector banks, laden with NPAs do not have funds to match such long term requirement of the sector and dragging LIC into it, will only weaken the insurer’s finances further.

Let us look at the fiscal mess that is getting readied for the government just four-and-a-half months ahead of the new financial year. A lofty FY20 disinvestment target of Rs 1.05 lakh crore and choppy markets are seriously pointing towards a major shortfall on that front. The cabinet is all set to clear the first-ever strategic sale of a public sector oil company – BPCL. In all likelihood, it will come this week. But will the disinvestment in BPCL start any time soon? Unlikely. In a real sense of share sale.

The market does not seem to have an appetite and the Moody’s latest lowering of outlook on BPCL may act as a spoiler. If the disinvestment in BPCL too goes HPCL way, then it is hardly disinvestment. Last year, the government sold its entire stake in HPCL to ONGC. In these kind of divestments, one arm of the government exchanges money with the other and there is no real monetary gain to the exchequer. Besides, the Air India share sale, which has almost been postponed to 2020, will make a dent in disinvestment realisation. Revenues from the telecom sector and spectrum are nowhere in sight due to a complete halt in profitability in the sector and the dominance of just one player.

On the tax revenue side, the government has garnered only a little above Rs 6 lakh crore in the first six months of the fiscal against the target of Rs 16.5 lakh crore.

To top it all, the government’s fiscal management itself is faulty. The goal of 3.3% fiscal deficit target for the current year excludes large off-budget borrowings, loans from NSSF, payment of food subsidy by FCI and deferment of fertilizer subsidies. This is one of the reasons India’s hidden deficits and debt levels are quite high and large chunk of revenues go into servicing them. To clean up the mess, the government first needs to own up that it has a larger than projected deficit numbers but that will have numerous other implications.