Daunting economic challenges await the new government

Dealing with the fallout of sub-normal monsoon will be the first major challenge for the new government, as per rating agencies; improving investment climate is the biggest task, India Inc has been yelling for months; untargeted subsidies that have cost an estimated 2.2 per cent of India’s GDP this year need to be removed, cry investors; the noise from within the government is that it needs to insulate urban poor from rising prices. India has problems galore! Not quite far is a new one.

 Disenchantment among foreign investors, especially after the BJP, widely expected to lead the next government, said it would ban foreign supermarkets from India’s $500 billion retail sector if it comes to power.  

The BJP’s disinclination to allow global retail firms into the Indian market may have stemmed from the fact that local retailers, who form a chunk of their vote bank, will suffer and there may not be any political gain from the decision. But experts opine that this is too myopic a view and economically unsound.

BJP has argued that the mom and pop store owners will lose their livelihood as they cannot face competition from the likes of Wal-Mart and Tesco. But the big retail supporters say that benefits they are going to bring in terms of competitiveness, infrastructure, improving supply chains and removing middlemen from the business chains far outweighs the shortcomings.

India’s onerous regulatory hurdles and risk of doing business have already made many a foreign investor leave the country. Earlier this month Japanese mobile operator NTT DoCoMo called it a day in India, prior to that another Japanese firm Daiichi Sankyo, a known name in drugmaking decided to quit. Just as India was looking for an alternative to US giant Wal Mart bidding goodbye that the murmurs of another company of an equal repute, France’s Carrefour’s exit plan began to be heard.

Some have quietly begun to pack their bags. Balfour Beatty, Britain’s largest construction company by sales, may be the one in that category. Some are deep in tax travails such as Britain’s Vodafone and Finland’s Nokia.

Foreign investment or the lack of it is one of the problems, but the process of rebooting India's growth engine, needs to take an equal care of agriculture, industry and manufacturing, all of which have shown lacklustre performance in the past couple of years. While India’s farm sector needs to be made more profitable, manufacturing requires to be developed at a faster rate because of its capacity to create jobs is higher than other sectors. Infrastructure is a pillar of progress and investment in the sector has a potential to re-ignite economic growth, create jobs and ease inflation. 

A worrying tale

This sector comprises several sub-sectors such as roads, railways, ports, airports, power and telecommunications. But, a look at the state of project clearances in the past one year tells a worrying tale. According to the Centre for Monitoring the Indian Economy (CMIE), there has been no pick up in new investments on ground and the number of abandoned or stalled projects have seen a sharp rise. It says, projects worth Rs 2.5 lakh crore were stalled in 2013-14. Only projects worth Rs 2.4 lakh crore finished versus the target of Rs 10 lakh crore. Around 40 per cent of the projects abandoned last year were due to land acquisition problems. The sectors most impacted by the slow execution rate were steel and metals.

The task cut out for the new government is not easy. It will have to start with delivering a budget that spells out more realistic plans to deal with deficits. The current government in its efforts to check the run away fiscal deficit may have pruned the development expenditure so much that it has started telling upon the economic growth. 

But at the same time, a proper pruning of rising subsidies have not been taken care of with precision. Giving 67 per cent of Indians a legal right to demand subsidised food every month may cost heavily to the exchequer at a time when the el-nino fears loom large on the country.Come July and the new law will be effected in all states and Union territories. As many as 11 states have already implemented the Act. A total of 6.12 million tonnes of grains are required for a pan India implementation of the Food Security Act and Rs 1.24 lakh crore worth of burden will have to be borne by the exchequer. 

The El Nino-induced weak monsoon may have an adverse impact on the food output this fiscal. Inflation, that has yet not showed signs of abating may reinvigorate spelling bad news for India’s overall economy.

Too much of emphasis on rural poor and social sector schemes especially meant for them have so far ignored the needs of the impoverished in the cities. National Statistical Commission chairman Pronab Sen recently expressed concern over the plight of poverty in urban centres. He said due to the rise in prices of agriculture produce, the rural poor benefited and their income went up, while the slowdown in industrial activity caused job losses and income erosion in urban areas. 

There is problem in coal sector, in power, roads, railways and shipping. India’s banking sector is facing one of the worst non-performing assets problem. Automobile sector is witnessing the worst slowdown in decades. Pressure on external sector is somewhat easing as the current account deficit has narrowed but it has been due to much compression in gold imports. India’s gems and jewellery sector is gasping for breath due to that. Does the new government need to think of text book solution of the problems such as inflation and growth or the one which actually works on the ground?