THE IN­DIA STORY

India Today - - COVER STORY | THE ECONOMY - —with Aravind Gowda and Ki­ran D. Tare

It’s not yet alarm­ing in terms of GDP growth or in­fla­tion, but the slow­down in var­i­ous sec­tors, run­away fuel prices, a free-fall­ing ru­pee and the cri­sis in bank­ing have left the econ­omy on a pre­car­i­ous perch

ers’ in­comes and prop up crop prices. A Re­serve Bank of In­dia (RBI) sur­vey said con­sumer con­fi­dence—re­flect­ing house­hold per­cep­tions and ex­pec­ta­tions on the gen­eral eco­nomic sit­u­a­tion, the em­ploy­ment sce­nario and the over­all price sit­u­a­tion—slipped to 94.8 points, down from 98.3 this June. To add to the gov­ern­ment’s em­bar­rass­ment, it hasn’t been able to bring back fugi­tive busi­ness­men Vi­jay Mallya, Ni­rav Modi and Me­hul Choksi yet, hurt­ing Modi’s im­age as an anti-cor­rup­tion cru­sader.

This is def­i­nitely not the sce­nario the Modi gov­ern­ment had en­vis­aged for the econ­omy on the eve of five state as­sem­bly polls and the gen­eral elec­tion next year. The Mood of the Na­tion poll con­ducted in Au­gust showed that a ma­jor­ity thought not much had changed or that things had be­come worse. Lack of jobs and price rise re­main the big­gest con­cerns. Busi­ness­men, once said to be a favoured lot un­der the gov­ern­ment, are now wary of in­vest­ing or em­bark­ing on risky projects.

But gov­ern­ment ad­vi­sors are quick to re­but any panic about the state of the econ­omy. “There is an is­sue about the cur­rent ac­count deficit (CAD) and the ru­pee; it is af­fect­ing all emerg­ing economies. There are prob­lems, but it’ll be wrong to say the econ­omy is in a cri­sis mode,” says a bu­reau­crat on con­di­tion of anonymity.

CRUDE MOOD

So, what has changed be­tween the early days of the Modi gov­ern­ment and now, and how alarm­ing is it? Are just ex­ter­nal fac­tors, largely not in the coun­try’s con­trol, to blame or are pol­icy mis­steps too re­spon­si­ble? Crude oil prices have been surg­ing af­ter the Or­gan­i­sa­tion of Pe­tro­leum Ex­port­ing Coun­tries, or OPEC, de­cided to cut pro­duc­tion lev­els. Since April 1 this year, Brent crude oil prices have surged by 24 per cent, from $68 per bar­rel to $84 as on Oc­to­ber 5. High oil prices spike the coun­try’s im­port bill as it buys most of its oil from over­seas, widen­ing the CAD to 2.4 per cent of the GDP in the first quar­ter. In 2017-18, In­dia im­ported 219 mil­lion tonnes of crude oil worth around $88 bil­lion (Rs 6.5 lakh crore), as per oil min­istry data. Every dol­lar per bar­rel change in crude oil prices im­pacts the im­port bill by Rs 823 crore.

As fuel prices rose and the pub­lic clam­oured for a price cut (the Congress ob­served a na­tion­wide bandh on Septem­ber 10), the Cen­tre, on Oc­to­ber 4, cut ex­cise duty on fuel by Rs 1.50, and asked oil mar­ket­ing com­pa­nies to cut re­tail prices by an­other Re 1. How­ever, this will dent gov­ern­ment rev­enues by Rs 10,500 crore this fis­cal, mak­ing it more chal­leng­ing for Jait­ley to stick to the fis­cal dis­ci­pline he has main­tained so far. Cer­tain BJP-ruled states, in­clud­ing Gu­jarat and Ma­ha­rash­tra, also re­duced fuel prices. De­spite th­ese cuts, petrol cost Rs 87.50 a litre and diesel Rs 77.37 on Oc­to­ber 8 in Mum­bai. As an economist put it, “The gov­ern­ment is in de­fen­sive mode. Rather than fram­ing poli­cies, it is re­act­ing to events. Once you get into that mould, it’s dif­fi­cult to come out of it.”

The other big global fac­tor hurt­ing In­dia and other emerg­ing economies is the US-China trade war. The tit-for-tat tar­iffs the two im­posed on each other’s goods im­pacted crude and base me­tal prices as well as in­vest­ment across bor­ders. The US has im­posed new tar­iffs of $200 bil­lion on Chi­nese goods ar­riv­ing on its shores this Septem­ber, even as China said it would re­tal­i­ate with tar­iffs on an­other $60 bil­lion of US goods. Al­though the US move to clamp tar­iffs on steel and alu­minum im­ports in March this year may not hurt In­dia in a ma­jor way, In­dia needs to tread care­fully, says Ajai Sa­hai, Di­rec­tor Gen­eral and CEO of the Fed­er­a­tion of In­dian Ex­port Or­gan­i­sa­tions, or FIEO, as it will be caught in the cross­fire. In­dia has said it will im­pose higher tar­iffs on some goods im­ported from the US start­ing Novem­ber 2, in re­tal­i­a­tion to US steel and alu­minum im­port tar­iffs. A di­rect trade war with US will hit In­dia’s al­ready trou­bled ex­ports fur­ther. In­dia ex­ported $48.6 bil­lion worth of goods to the US in 2017-18, com­pared to $25.7 bil­lion worth of im­ports from the coun­try.

RU­PEE IN A TAIL­SPIN If ris­ing oil prices rat­tled the con­sumer, the fall­ing ru­pee shook up fi­nan­cial mar­kets. ‘The rise in crude prices has ex­erted pres­sure on the CAD of oil im­port­ing coun­tries such as In­dia, which has fur­ther led to de­pre­ci­a­tion of the cur­ren­cies,’ says a re­port from Crisil. From 65.1 to a dol­lar on April 2 this year, to 71 on Au­gust 31, the ru­pee de­pre­ci­ated 9 per cent, which Crisil at­tributes to the RBI move to in­crease the repo rate twice by 25 ba­sis points. The ru­pee weak­ened fur­ther (74.4 to a dol­lar on Oc­to­ber 9) af­ter the US Fed raised in­ter­est rates a third time this cal­en­dar year,

STATE-OWNED BANKS ARE STRUG­GLING TO AD­DRESS THE MOUN­TAIN OF OVER Rs 9 LAKH CRORE OF BAD LOANS THEY HAVE AC­CU­MU­LATED ON THEIR BOOKS

FOR THE FIRST TIME, THE VALUE OF NEW PROJECTS AN­NOUNCED BY PRI­VATE PLAY­ERS THIS QUAR­TER WAS LOWER COM­PARED TO PUB­LIC SEC­TOR PROJECTS

says the re­port.

Sa­hai busts the myth that a weak ru­pee alone can aid ex­ports. A de­cline in mer­chan­dise ex­ports by 2.15 per cent in Septem­ber 2018 showed that the de­pre­ci­a­tion did not help. “We con­tinue to bear the high cost of raw ma­te­ri­als and in­ter­ests,” said a state­ment from the

EEPC (En­gi­neer­ing Ex­ports Pro­mo­tion Coun­cil). The higher ru­pee also singes cor­po­rates with large bor­row­ings from for­eign mar­kets in the form of ex­ter­nal com­mer­cial bor­row­ings (ECBs), as it in­creases their in­ter­est outgo.

On the other hand, the high cost of im­ports can have a spi­ralling ef­fect. “In­dia is a much poorer coun­try (its per capita in­come in 2018 was $2,000 or Rs 148,000; lower than Ar­gentina’s $14,300 and Turkey’s $10,500). As prices of im­ported goods rise, a much larger pro­por­tion of In­di­ans will bear the pain,” says Prof. Na­garaj.

The gov­ern­ment had an­nounced five mea­sures on Septem­ber 14 to shore up the ru­pee and rein in the widen­ing CAD. Th­ese in­cluded curb­ing of non-es­sen­tial im­ports and in­creas­ing ex­ports, re­view­ing the manda­tory hedg­ing con­di­tion for in­fra­struc­ture loans bor­rowed un­der the ECB route, per­mit­ting the man­u­fac­tur­ing sec­tor to ac­cess ECBs up to $50 mil­lion with resid­ual ma­tu­rity of one year in­stead of three, ex­empt­ing masala bonds (bonds is­sued out­side In­dia but de­nom­i­nated in In­dian cur­rency in­stead of the lo­cal one) from with­hold­ing tax this fi­nan­cial year and bring­ing for­eign port­fo­lio in­vestors into the cor­po­rate debt mar­ket by re­mov­ing re­stric­tions on their in­vest­ments. Cus­toms du­ties were hiked on 19 items, in­clud­ing re­frig­er­a­tors and air con­di­tion­ers, from 10 per cent to 20 per cent. But th­ese mea­sures did not have any sub­stan­tial im­pact in sta­bil­is­ing the ru­pee. Many ex­pected the RBI to in­ter­vene and raise key rates to keep the ru­pee in check, but it main­tained sta­tus quo in its Oc­to­ber 5 an­nounce­ment, say­ing it would rather stick to its man­date of ‘in­fla­tion tar­get­ing’. IN­VEST­MENT SLUMP

One of the big­gest hopes from the Modi gov­ern­ment was that it would in­stil con­fi­dence in in­vestors in man­u­fac­tur­ing and in­fra­struc­ture, two sec­tors key to more em­ploy­ment and growth. How­ever, that has not hap­pened, as new data from the Cen­tre of Mon­i­tor­ing In­dian Econ­omy (CMIE) shows. Ac­cord­ing to the data, new in­vest­ment an­nounce­ments have de­clined in the July-Septem­ber pe­riod for the sec­ond quar­ter in a row. Pri­vate and pub­lic sec­tor com­pa­nies to­gether an­nounced new projects worth Rs 1.49 lakh crore in the quar­ter end­ing Septem­ber, 41 per cent lower than the pre­ced­ing one. The share of stalled projects also in­creased marginally dur­ing the July-Septem­ber quar­ter. As much as 24 per cent of all pri­vate projects re­mained stalled in the quar­ter un­der re­view. The power sec­tor was hit the hard­est, with the high­est share of stalled projects at 35.5 per cent, fol­lowed by man­u­fac­tur­ing where 29.5 per cent projects were stalled.

This has hap­pened mainly due to the lack of funds and fuel, short­ages of raw ma­te­rial and un­favourable mar­ket con­di­tions. “The big­gest ca­su­alty has been in­vest­ment—In­dia’s in­vest­ment ac­counted for 30.8 per cent of its nom­i­nal GDP in March 2018, a lit­tle higher than 30.1 per cent in the pre­vi­ous quar­ter,’” says Maitreesh Ghatak, pro­fes­sor of eco­nom­ics at the Lon­don School of Eco­nom­ics.

In con­trast, from June 2004 to March 2018, in­vest­ment av­er­aged 35.1 per cent, with an all-time high of 41.2 per cent in Septem­ber 2011. It reached a record low of 29.6 per cent in March 2017, post-de­mon­eti­sa­tion.

The lat­est busi­ness to­day Busi­ness Con­fi­dence In­dex sur­vey con­ducted in the July-Septem­ber quar­ter showed a drop in con­fi­dence lev­els of busi­ness lead­ers. On a scale of 100, the in­dex for the quar­ter stood at 48.7, lower than 49.3 in the pre­vi­ous quar­ter. It was also lower than the 51.4 in Jan­uary-March 2014, just be­fore the Modi gov­ern­ment came to power.

SINK­ING BANKS

Bank­ing woes con­tinue as the moun­tain of bad loans keeps grow­ing. Re­cent RBI data shows that be­tween April 2014 and April 2018, the coun­try’s 21 state-owned banks ended up writ­ing off Rs 3,16,500 crore of loans.

One of the gov­ern­ment’s reme­dies for the bank­ing sec­tor has been con­sol­i­da­tion. Re­cently, three pub­lic sec­tor banks—Bank of Bar­oda, Vi­jaya Bank and Dena Bank—were merged to cre­ate In­dia’s third largest bank with to­tal busi­ness worth Rs 14.82 lakh crore. The con­cern some ex­perts have is that post a merger, noth­ing—the cap­i­tal, net worth or the as­sets of the banks—re­ally changes. Though the com­bined num­bers look im­pres­sive, they do lit­tle to im­prove the over­all per­for­mance of th­ese banks.

The pri­vate bank­ing sec­tor has its own share of trou­bles. Ear­lier this month, ICICI Bank chief Chanda Kochhar, mired in a con­flict-of-in­ter­est con­tro­versy for months, re­signed.

But the big­gest shock in re­cent months has come from shadow bank­ing firm IL&FS, a com­pany with an­nual rev­enues of close to Rs 19,000 crore, and ac­knowl­edged as the pi­o­neer in pub­lic pri­vate part­ner­ships (PPPs) in In­dia. In a sur­prise move on Oc­to­ber 1, the Cen­tre re­placed all board mem­bers of the be­lea­guered in­fra­struc­ture fund­ing firm by mov­ing the Na­tional Com­pany Law Tri­bunal (NCLT), as it at­tempted to as­suage the con­cerns of fi­nan­cial mar­kets af­ter the firm de­faulted on its loans. IL&FS’s col­lapse could re­ver­ber­ate in the credit mar­kets with knee­jerk re­ac­tions ad­versely af­fect­ing credit flow (which, in fact, has been de­cel­er­at­ing for years now) to pro­duc­tive sec­tors.

The worry is there might be more skele­tons in

the closet. The RBI, too, has raised a red flag on the work­ing of NBFCs, say­ing credit growth in shadow bank­ing is much higher than nom­i­nal GDP and that reg­u­la­tions need to be tight­ened fur­ther for credit growth to come down to nom­i­nal GDP lev­els. This will ag­gra­vate the credit squeeze.

RU­RAL DIS­TRESS

In Kushalpura vil­lage, just over an hour’s drive from Ra­jasthan’s cap­i­tal Jaipur, a group of women lament the per­ilous state of their fi­nances. Among them is Kamla Devi, 60, whose hands, bruised and coarse from decades of work­ing in the fields, move em­phat­i­cally as she says “Main bas haath pe haath rakh kar baithi rahti hoon (I just sit idle all day).” She has a lit­tle less than an acre of land but is un­able to cul­ti­vate it for lack of wa­ter. Selling milk fetches her a mere Rs 20 a kilo. In the har­vest sea­son, she earns Rs 200 a day cut­ting ba­jra from the fields. It’s a fa­mil­iar story in th­ese parts. There isn’t enough work, farm­ing is no longer lu­cra­tive and there are few op­por­tu­ni­ties around.

The three kharif crop-grow­ing states—Gu­jarat, West Ben­gal and Bi­har—are af­fected by weak rain­fall. Ac­cord­ing to a Crisil anal­y­sis, sev­eral states such as Ra­jasthan, Mad­hya Pradesh, Ut­tar Pradesh, Andhra Pradesh, Kar­nataka and Ma­ha­rash­tra had pock­ets of se­vere mon­soon de­fi­ciency in the cru­cial months of July and Au­gust which im­pacted sow­ing. The re­port points out that 2018 is turn­ing out to be an­other year where farmer in­comes have re­mained low; in fact, mandi prices have been trail­ing min­i­mum sup­port prices an­nounced in July.

For Kishor Patil, 37, a cot­ton and jowar farmer in Parola in the Jal­gaon district of Ma­ha­rash­tra, the main chal­lenge is to get bet­ter prices for his farm pro­duce. The gov­ern­ment pur­chases cot­ton at Rs 5,600 per quin­tal; the price goes up to Rs 6,000 per quin­tal in the open mar­ket. “Th­ese are the rates for the best qual­ity cot­ton. I never get this rate as my cot­ton is never ad­judged the best nei­ther by gov­ern­ment agen­cies nor pri­vate traders,” he says.

An economist, high­light­ing the ur­gency to lift farm in­comes, says the gov­ern­ment has to get prices up to MSP lev­els. If food prices don’t go up in the next few days, the gov­ern­ment and econ­omy will have a big prob­lem on their hands be­cause fes­tive spend­ing will be lower, de­press­ing the mood fur­ther.

TRIPPING BUSI­NESSES

When the Modi gov­ern­ment ac­corded a big push to man­u­fac­tur­ing through its ‘Make in In­dia’ cam­paign, it also said the move would be sup­ported by an equally big push to the ease of do­ing busi­ness. In­dia, went the gov­ern­ment’s nar­ra­tive, needed to shake it­self out of its tra­di­tional im­age of be­ing a slow-mov­ing gi­ant, shack­led by ar­chaic labour laws, de­lays in land ac­qui­si­tion, cor­rup­tion and red tape that threat­ened to de­lay projects and drive out in­vestors. The jet-set­ting PM and his busi­ness del­e­ga­tions were woo­ing in­vest­ments from ev­ery­where. States were made to com­pete with each other on ease of busi­ness rank­ings, that would then be pub­licly dis­played. FDI was en­cour­aged in cer­tain sec­tors through pol­icy re­forms, and the Goods and Ser­vices Tax (GST) was launched, sub­sum­ing dozens of state and lo­cal levies, which ought to have made trans­ac­tions more trans­par­ent and sim­pler.

How­ever, de­spite all this, man­u­fac­tur­ing has failed to make an im­pact, hov­er­ing around 17 per cent of the GDP, with mi­nus­cule job cre­ation. Ex­ports have been strug­gling, and start-ups are still com­plain­ing of dif­fi­cul­ties to get their en­ter­prises off the ground. Mean­while, GST got off to a bumpy start, dogged by poor im­ple­men­ta­tion, tech­ni­cal glitches in the launch stages and fre­quent rate tweaks. GST col­lec­tions con­tinue to miss tar­gets, throw­ing the gov­ern-

MAN­U­FAC­TUR­ING HAS FAILED TO MAKE ANY IM­PACT, HOV­ER­ING AROUND 17 PER CENT OF THE GDP, WITH NEXT TO NO JOB CRE­ATION

ment’s rev­enue tar­gets into a tail­spin.

Man­jit Singh, 47, of Dashmesh En­gi­neer­ing in Bengaluru, says prof­its for his busi­ness are low de­spite bet­ter de­mand. “Cus­tomers ex­pect Eu­ro­pean qual­ity at Chi­nese pric­ing,” he says, re­fer­ring to cheaper goods from the lat­ter. Singh, who has an an­nual rev­enue of Rs 1.3 crore, wants GST to be re­duced to 5-6 per cent from 18 per cent and in­ter­est rates on in­dus­trial bor­row­ing low­ered from 12-13 per cent to 4-6 per cent.

A pol­icy paral­y­sis is also bog­ging down the coal min­ing sec­tor. In­dia is the world’s sec­ond largest coal im­porter while state-run Coal In­dia Ltd (which pro­duces more than 80 per cent of In­dia’s coal) con­tin­ues to miss its pro­duc­tion tar­gets. Coal blocks were re­al­lo­cated fol­low­ing ir­reg­u­lar­i­ties in auc­tions un­der the UPA. But, of the 163 blocks al­lo­cated, just over a dozen have reached their de­sired pro­duc­tion level. The rest have ei­ther not se­cured en­vi­ron­men­tal clear­ance or failed to sub­mit ac­cept­able min­ing plans.

NO QUICK FIXES

De­spite the over 8 per cent growth in the June quar­ter, the coun­try may find it dif­fi­cult to sus­tain it. Var­i­ous es­ti­mates sug­gest that In­dia will close the year at about 7.3 per cent. “In­dia can­not sus­tain 8 per cent growth. Pro­duc­tive ca­pac­ity of the econ­omy is not there. When In­dia grew at 8 per cent in the past, there were global tail­winds,” says an economist. Part of the rea­son why the coun­try saw strong growth in the last quar­ter was be­cause it emerged from the bot­tom af­ter GST and de­mon­eti­sa­tion, he adds.

There are ob­vi­ously no quick fixes for prob­lems in the econ­omy. To re­store con­fi­dence, the gov­ern­ment must take mea­sures to stem spec­u­la­tive dol­lar de­mand. Since pri­vate in­vest­ment has stalled again, pub­lic sec­tor in­vest­ment will have to keep pace. In­dia will have to work ag­gres­sively on its long-term strat­egy to re­duce depen­dency on im­ported crude and push for­ward a slew of ini­tia­tives to­wards so­lar, re­new­able sources. Those tar­gets will have to be re­vised and the pace quick­ened. The move to re­new­able en­ergy will have to be sup­ple­mented by shale gas and util­i­sa­tion of coal-based en­ergy.

D.K. Shri­vas­tava, Chief Pol­icy Ad­vi­sor, EY, adds that it is crit­i­cal for the gov­ern­ment to bring down the CAD and fis­cal deficit to sus­tain­able lev­els (2.4 and 6 per cent, re­spec­tively). “Shaky macros ad­versely af­fect In­dia’s im­age. It drives in­vestors away and the fight is about the per­cep­tion of the In­dian econ­omy,” he says.

To aid busi­nesses, ex­perts say that just as GST sup­pos­edly sim­pli­fied the coun­try’s tax laws (the im­ple­men­ta­tion glitches and fre­quent changes not­with­stand­ing), you need a sim­i­lar ini­tia­tive to prune the var­i­ous modal­i­ties in es­tab­lish­ing a new busi­ness. Some say an on­line sin­gle-win­dow clear­ance would be best in in­creas­ing trans­parency and help­ing cor­po­rates ex­pand or es­tab­lish their busi­ness. The other is­sues that need to be ad­dressed are sim­pli­fy­ing land ac­qui­si­tion laws, which re­main cum­ber­some; re­duc­ing the time and pro­cesses re­quired in re­ceiv­ing con­struc­tion per­mits; im­prov­ing in­vestor pro­tec­tion and en­force­ment of con­tracts; and sim­pli­fy­ing tax­a­tion pro­cesses, among oth­ers.

On Oc­to­ber 6, Jait­ley said there are some more steps on the anvil to nar­row CAD and bol­ster forex in­flows. On Oc­to­ber 11, im­port du­ties on 15 more items were hiked to 20 per cent to rein in the CAD and shore up the ru­pee, af­ter stock mar­kets crashed 1,000 points in in­tra­day trade amid a sell-off in global mar­kets. A pos­si­ble is­sue of bonds to non-res­i­dent In­di­ans is also on the cards. Mean­while, the SBI has said it will buy loans worth Rs 45,000 crore from NBFCs as a mea­sure to in­ject more liq­uid­ity into the cash-starved sec­tor. While its in­ten­tions may be earnest, the gov­ern­ment does not have enough time to chart out a re­vival of the econ­omy in time for a good re­port for May 2019.

NILADRI DAS

VEGETATIVE STATE Es­ca­lat­ing fuel prices have had a cas­cad­ing ef­fect on food prices

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