A GLASS HALF FULL
The finance ministry has tried to usher in far-reaching structural reforms in the economy, but implementation glitches remain. Now, the surge in oil prices presents the government with a huge challenge
f it was business as usual to bump into an Anil Ambani, chairman of Reliance Group, at North Block, waiting for time with the finance minister, four years later, it is rare to spot a business tycoon in the corridors of the finance ministry. The change in the rules of doing business in India is quite stark. At the forefront of this transition from relationship-based deal-making to rule-based order has been the finance ministry led by Arun Jaitley. A firsttime finance minister, Jaitley used his negotiating skills to drive consensus on key reforms, such as the Goods and Services Tax (GST). He has been conservative in his approach and has largely played it safe.
Four years ago, the economy was battling a weak rupee, depleted foreign reserves, high fiscal and current account deficits and double-digit inflation. In 2018, the macroeconomic indicators have improved considerably—consumer price inflation averaged 4.7 per cent in 2015-2018 against the 10.2 per cent average in the preceding five years; current account deficit nearly halved in the past four years and foreign exchange reserves have gone up substantially, according to an analysis by Crisil. The rupee’s depreciation reduced to 1.7 per cent against 5.5 per cent in the preceding five years.
Reforms like GST and the Insolvency and Bankruptcy Code (IBC) promise to fundamentally alter the rules of doing business. IBC is a broad signal that the brazen way of taking loans and not repaying will not work any more.
The government has made a concerted effort to improve tax compliance and bring more people into the formal economy through the Income Declaration Scheme and demonetisation. Direct tax growth accelerated
even as GDP growth slowed down in the last two fiscals. Despite the initial hiccups, India’s indirect tax base increased by over 50 per cent after the implementation of GST. The tax to GDP ratio went up to 6 per cent in FY18 from 5.7 per cent in FY14. Direct tax collections grew 1.9 per cent in FY18 from 0.6 per cent in FY16. While the jury is still out on demonetisation, with some economists suggesting it potentially shaved off 1-2 per cent of GDP growth, its impact is reflected in increased direct tax (largely income tax) compliance.
However, there is consensus that jobs have not kept pace with the 7.4 per cent growth rate and private investments have not taken off even as India climbed the ease of doing business rankings. The rural economy suffered despite normal monsoon and a bumper crop in 2018. Real agriculture GDP growth nearly halved to 2.4 per cent during FY15-18 from 4.3 per cent in FY10-14. The construction sector—a major job creator— took a hit from demonetisation and GST.
But the minister will have to brave out his toughest storm in the form of rising oil prices, which will directly impact the current account deficit and could fuel inflation. With petroldiesel rates reaching historic highs, there is a demand for lowering central and state duties on retail fuel. Also, not fixing the glitches in GST will affect growth while a less-than-normal monsoon will aggravate problems in the rural economy, which may prove to be the biggest drag yet for the Modi government as it goes into poll mode next year.