THE INDIA STORY
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.