Clouds Are Dark, Grey and Sil­ver

THE FO­CUS SHOULD BE ON RE­FORM AS THE BIGGEST STRESS RE­MAINS IN AGRI­CUL­TURE, POWER AND BANK­ING.

Business Today - - ECONOMY > COLUMN - The writer is Chief Econ­o­mist, Aditya Birla Group BY AJIT RANADE

As we usher in the new year, the eco­nomic out­look is cloudy. But these clouds have shades of dark, grey and sil­ver. One can sum it up as cau­tious op­ti­mism – a glass half-filled rather than half empty. De­spite sev­eral chal­lenges, In­dia con­tin­ues to be the fastest-grow­ing large econ­omy, with an ex­pected growth of around 7.5 per cent.

First, a look at the dark clouds. Stock mar­kets have taken a big beat­ing, es­pe­cially in New York and China. The De­cem­ber rout in the U.S. stock mar­ket was the worst since the Great De­pres­sion of the 1930s. It is all the more re­mark­able since 2018 was a year of record cor­po­rate prof­its, thanks to the tax cuts an­nounced by Pres­i­dent Trump. To top it, more than $1 tril­lion of those prof­its were used by the com­pa­nies to buy back their shares. But it was not enough to prop up share prices. The U.S. econ­omy is in its 11th year of con­tin­u­ous ex­pan­sion of out­put and jobs. But too much of debt has piled on. Wash­ing­ton is in lock­down since law­mak­ers can­not agree to re­lax the debt ceil­ing. A slow­down is in­evitable if not a re­ces­sion. And the mood is som­bre be­cause of the sabre-rat­tling and talks of a trade war with China. No­body wins a trade war. Rais­ing high tar­iff walls raises prices, hurts con­sumers and even­tu­ally, the in­dus­try, and com­pet­i­tive­ness goes down. Hope­fully, cooler heads and trade peace will pre­vail. Mean­while, the Chi­nese are wor­ried about their own slow­down. Hence, mon­e­tary stim­u­lus is con­tem­plated.

What about the sil­ver lin­ing? It has come from the sharp drop in oil prices. A few months ago, it looked like oil could hit $100 per bar­rel, but it has dropped to $50 now. Oil is one of In­dia’s biggest vul­ner­a­bil­i­ties. The dou­ble whammy of high oil price and weak ru­pee is be­hind us. Cheaper oil pro­vides re­lief to fis­cal and cur­rent ac­count deficits, leads to lower in­fla­tion and in­creases man­u­fac­tur­ing com­pet­i­tive­ness. An­other sil­ver lin­ing is the for­eign di­rect in­vest­ment. In 2018, In­dia at­tracted $40 bil­lion of FDI, over­tak­ing China. In­bound re­mit­tance at $80 bil­lion is the world’s high­est. Also, the jump from 142 to 77 in the global rank­ing of ease of do­ing busi­ness must have cre­ated a huge in­ter­est and pipeline of deals. Tele­com and do­mes­tic air­line traf­fic has been surg­ing although these are largely prof­it­less due to cut­throat price com­pe­ti­tion. Lead in­di­ca­tors are sug­gest­ing an up­ward move in in­dus­trial in­vest­ment even though the in­vest­ment-to-GDP ra­tio at 31 per cent is still below the 2008 peak. In­vest­ment in in­fra­struc­ture, es­pe­cially in roads and wa­ter­ways, has main­tained a healthy mo­men­tum that will pay off soon. The bank­ruptcy code and process have yielded hand­some gains in terms of value un­lock­ing, re­cov­ery of bad loans and bid­ders gain­ing con­trol of prize as­sets. The Goods and Ser­vices Tax is con­verg­ing to a sin­gle rate (which should have hap­pened much ear­lier), and that should help re­duce lit­i­ga­tion and dis­putes and in­crease the buoy­ancy in col­lec­tions.

That brings us to the grey clouds. The biggest stress is in agri­cul­ture, power and bank­ing. De­spite a gen­er­ous of­fer of min­i­mum sup­port prices for 22 crops, farm­ers’ ac­tual in­come is stag­nant and food in­fla­tion is in neg­a­tive ter­ri­tory. The in­ef­fi­ciency of the value chain – from farm to fork

– is in­ex­cus­able, with ur­ban dwellers pay­ing five times the price re­ceived by farm­ers. Low farm prices and other woes be­came man­i­fest in the elec­toral out­comes of the three states. It led to a spate of loan waivers, which are un­bud­geted prom­ises. Loan waivers pun­ish those who re­paid, cre­ate per­verse in­cen­tives and de­plete the trea­sury, but these are po­lit­i­cally ir­re­sistible. How­ever, the new year will wit­ness more fo­cus on re­forms in the farm sec­tor. These in­clude the re­moval of ex­port re­stric­tions, do­ing away with mid­dle­men con­straints, pro­vid­ing ac­cess to fu­tures mar­kets and di­rect in­come sup­port to farm­ers. As for bank­ing, the NPA stress will con­tinue. How­ever, the liq­uid­ity crunch in­duced by the ILFS episode is be­hind us. Again, a deep­en­ing cor­po­rate bond mar­ket is the key. The se­cu­ri­tis­ing of re­ceiv­ables of SMEs traded on the TREDS plat­form is a great step for­ward. The tweak to Aad­haar Act, al­low­ing for vol­un­tary sign­ing up, should help bank­ing and tele­com. The awk­ward re­stric­tion on e-com­merce play­ers should go. We now have price con­trols both from below (deep dis­count­ing) and above (an­tiprof­i­teer­ing law), which is against the spirit of re­forms.

Thus, we head into the elec­tion sea­son. And there are enough bright spots do­mes­ti­cally in spite of the gath­er­ing gloom out­side.

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