Ad­dress­ing Short-Term Pains

India Business Journal - - VIEWPOINT -

The Vol­ume-II of the Eco­nomic Sur­vey 2016-17 is out. And the prog­no­sis, as ex­pected, is not too rosy. There is gloom in the short term, but there are sparks of hope in the medium and long terms. The latest sur­vey pre­dicts that growth would be lower than 7.5 per cent in the cur­rent fi­nan­cial year.

With global growth pick­ing up, in­fla­tion at record lows and in­ter­est rates start­ing to trend down, the en­vi­ron­ment ap­pears to be more than en­cour­ag­ing. How­ever, a clutch of fac­tors are queer­ing the pitch, from lower real farm in­comes and farm loan waivers - an ex­haus­tive cover story on the farm sec­tor in the en­su­ing pages would deal in more detail on this sub­ject - tran­si­tional trou­bles from the roll­out of the GST, a strength­en­ing cur­rency and prof­itabil­ity pres­sures in the tele­com and power sec­tors.

The Sur­vey at­tributes most of the stress in the power sec­tor to large ad­di­tions to ca­pac­ity and the wel­come drop in re­new­able power prices. The hard re­al­ity is that con­tin­ued power theft and paucity of the po­lit­i­cal will needed to make peo­ple pay for the power they con­sume are at the core of the cri­sis in power.

The Sur­vey es­ti­mates that around half of the gen­er­a­tion ca­pac­ity in the pri­vate sec­tor is un­vi­able since it op­er­ates at a PLF of be­low 60 per cent. And with a host of dis­coms look­ing to rene­go­ti­ate tar­iffs, un­mind­ful of reneg­ing on ex­ist­ing PPAs, there could be more trou­ble. Un­less there is a way to en­force con­tracts or re­work them in such a man­ner that nei­ther buy­ers nor sell­ers lose out too much, more ca­pac­ity could end up be­com­ing un­vi­able.

The big­ger worry is that there is lit­tle sign of pri­vate sec­tor capex pick­ing up. Since States that write off farm loans will need to prune ex­pen­di­ture to en­sure they stay fis­cally pru­dent, this could hurt in­vest­ments. More­over, not only will the ex­pen­di­ture cuts de­press de­mand, States with fis­cal room will end up bor­row­ing more which, in turn, will crowd out pri­vate sec­tor spend­ing. This means that the Union gov­ern­ment must con­tinue to spend more. Be­tween April and June, the Cen­tral gov­ern­ment’s capex has more than dou­bled year on year, and the tempo needs to be main­tained.

In­deed, cor­po­rate re­sults for the June quar­ter re­flect how pre-GST de­stock­ing has hurt sales across a host of con­sumer goods and phar­ma­ceu­ti­cal com­pa­nies. How­ever, the re-stock­ing process seems to have be­gun and in­ven­to­ries should nor­malise in the next few months.

But, as the sur­vey points out, for a larger re­vival, the twin bal­ance sheet prob­lem - high cor­po­rate in­debt­ed­ness and banks' ris­ing bad loans - needs to be ad­dressed be­fore banks start lend­ing again. With­out strong bal­ance-sheets, banks will be se­verely limited in their abil­ity both to lower in­ter­est rates and to lend. The process of set­ting right the twin bal­ance sheet prob­lem has been kick-started, and banks have now re­ferred a dozen big com­pa­nies to the in­sol­vency court.

Mean­while, growth is im­por­tant, sim­ply be­cause there can be no jobs and in­comes with­out it. If growth, in­vest­ment and job creation show no vis­i­ble signs of pick-up, the econ­omy, polity and so­ci­ety too will face se­ri­ous trou­bles.

The last three years have seen sig­nif­i­cant re­forms, whether in GST, digi­ti­sa­tion, tax com­pli­ance, di­rect ben­e­fit trans­fer, in­fla­tion tar­get­ing or bank­ruptcy res­o­lu­tion. These will no doubt yield fruits in the medium and long terms. But en­sur­ing growth in the im­me­di­ate term is no less im­por­tant. Hence, a larger set of re­forms will be needed than those that are in place right now. The Modi gov­ern­ment only needs to get the wise sug­ges­tions on the pages of the sur­vey on to the ground.

The last three years have seen sig­nif­i­cant re­forms, whether in GST, digi­ti­sa­tion, tax com­pli­ance, di­rect ben­e­fit trans­fer, in­fla­tion tar­get­ing or bank­ruptcy res­o­lu­tion. These will no doubt yield fruits in the medium and long terms. But en­sur­ing growth in the im­me­di­ate term is no less im­por­tant.

The sur­vey pre­dicts that growth would be lower than 7.5% in FY18.

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