Addressing Short-Term Pains
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.