THE SILVER LINING

On macrostability and pushing structural reforms, India seems on course. But private investment and job creation are big worries

WHEN ARUN JAITLEY addressed an investor meet in New York last month on April 25, the response was lukewarm. “The India story is good but not very exciting, the authorities were a bit evasive about job creation, NPAs. Nothing really struck me as very exciting to kick off private investment,” said an economist who was there. And that perhaps sums up Jaitley’s future challenge.

But back home, from a macro perspective, the Indian economy is in a sweet spot. The estimated 7.4 per cent GDP growth in 201718 is likely to be the highest among large economies. The International Monetary Fund describes India as the “bright spot” amid a global gloom. With a 3.2 per cent fiscal deficit and current account deficit down to one per cent, we seem to have fixed what had been an endemic issue. The rupee is sitting strong at 64.40 to the US dollar. CPI inflation is at 3 per cent while exports, after a dismal showing over three fiscals, are staging a comeback. India is the poster child for foreign institutional investors with stock markets at a record high.

The country’s consistent efforts to push through structural reforms has brightened its fiscal picture and future prospects. Be it fiscal discipline in the budget or pushing through the Goods and Services Tax or the bankruptcy code, they are all steps directed at resolving issues endemic to India’s polity and economy.

The GST hopes to correct India’s skewed tax compliance. Consider this: just 37 million individuals filed income tax returns in 201516. The government claims that efforts through voluntary disclosure schemes and a stronger tax administration are gradually widening the tax base. The finance minister says income tax collections are up with number of assessees at 42.8 million.

Macro stability (see graphic) remained elusive through much of UPAII. The first three years then were characterised by high inflation, a grave twin deficit problem and policy paralysis. In contrast, the three years of the Narendra Modiled NDAII have been about restoring macro stability, fundamental reforms and a push towards greater transparency and accountability.

Battling to regain credibility in the wake of widely publicised corruption scandals and precarious macrofundamentals, India has reclaimed its position in the world thanks to a very aggressive prime minister and a savvy finance minister who has spent a lifetime building relationships within the country and across the globe.

Arguing that the current pace of fiscal reform is comparable with the first big push during the Narasimha Rao government in 1991, which slowed down by 1993,

Jaitley insists “there is no finish line for this government”.

That said, demonetisation has been one of the most disruptive events in India’s economic history. And although the jury’s still out on whether it was an economically prudent measure, the government counts it as a ‘success’ and politically the party has reaped dividends for it. Jaitley sees three significant positives: “A message has sunk in that it’s no longer safe to deal in cash whether it is property or anything (else); there’s greater movement towards digitisation; and our tax collections, particularly income tax, have gone up,” he says.

Many, however, disagree and say that the move caused grave damage to the informal economy, which would reveal itself in fiscal numbers in coming quarters. Also, there is an inadequacy of data in capturing the impact on the informal sector. The National Sample Survey Office (NSSO), the main source of data, releases data with a year’s lag and data is captured at a frequency ranging from two to five years, making it very difficult to gauge the impact of demonetisation in the short term.

While India is far from being a black moneyfree society, the good news is that the real estate sector, notorious for pushing the shadow economy, is showing signs of a cleanup. Economist Surjit Bhalla is confident that “demonetisation will go down in history as one of the most innovative experiments for combating black money and making tax compliance go up”. Amid sharp differences on its eventual outcome, there is agreement that demonetisation has changed the economic narrative of India. Economists concur that it cannot be viewed through the prism of a cost benefit analysis alone.

Finance minister Jaitley’s other big ticket reform was bringing in the longpending Bankruptcy Code, a law that enables quicker and timebound resolution of insolvency cases for both individuals and companies. Earlier, matters could drag on for years. “It is sowing the seeds of a longer term impact,” says Ajit Ranade, chief economist at the Aditya Birla Group.

In taxation, India will finally have a Goods and Services tax in place by July this year. On subsidies, there has been an effort to curb leakages and pilferage. Finance ministry data shows over Rs one lakh crore was paid out to beneficiaries of various social sector schemes under the Direct Benefit Transfer scheme during the past three years. The number of central schemes was pruned to 300 from 1,500, and centrally sponsored schemes from 66 to 28.

Dismantling the Foreign Investment Promotion Board, constituted to evaluate FDI proposals and empower

individual ministries to clear projects, was another move to foster efficiency. FDI inflows have shown a jump to $56 billion in 2015-16, from $16 billion in 2013-2014. However, a considerable part of FDI inflow is in the form of mergers and acquisitions and not towards generating economic activity.

On the gnawing issue of stress on the banking sector, the government has empowered the RBI to identify specific stressed assets in banks and initiate insolvency and bankruptcy proceedings against them. Amendments to the Banking Resolution Act will be introduced in the next session of Parliament.

NOT A WHIMPER

The one big failing over three years of the Modi government is its inability to create new jobs. This stands out even more starkly considering the BJP vociferously vilified the UPA’s ten years as a period of jobless growth. Also, PM Modi did promise voters 10 million new jobs every year.

In 2015-16, only 135,000 jobs were created across eight key sectors—manufacturing, construction, trade, transport, hotels and restaurants, IT and BPO, education and health. Evidently initiatives like Make in India, Skill India and Start-Up India have failed at any significant generation of employment.

Rajiv Kumar of the Centre for Policy Research suggests ‘self employment’ as the way forward. “In the context of internet technology, artificial intelligence etc, the individual may well be the centre of change rather than big corporates,” he says.

And despite their effervescent praise of the government, big corporates have shied away from investments. Peaking at roughly 16 per cent of GDP in 2007-08, corporate investment has since fallen to under 10 per cent. A November 2016 analysis by the National Institute of Public Finance & Policy states that for a sustained 8 per cent growth, private investment needs to rise well above 25 per cent of GDP.

Another big criticism has been the failure to develop a more market-oriented approach. The government has consistently slipped on its disinvestment targets, and now, with the stock market touching new highs, it would have been a good time to finally deliver on its minimum government agenda. The government’s policy advisory body, Niti Aayog, has suggested strategic disinvestment in 12 public sector units. Lastly, India is poised to take a big leap with many positives working in its favour, but it could all be frittered away if the government loses focus from job politics to cow politics.