Rupee In Uncertain Place, Can Bullish BJP Buck The Trend In Second Innings?

As India prepares for the second innings of the Modi government, the economic scenario in the country is not too upbeat despite expectations of over seven per cent GDP growth in 2019-20. Though the BJP led government has so far not admitted to a slowdown in growth or voiced concerns over clear signs of dip in consumer spending, economists are not shying away from recognising the challenges ahead for the new government.

“There is lot of smoke around the growth narrative. If you look beyond just the GDP numbers at high frequency indicators, then all of them: exports, savings, investment, freight traffic, electricity consumption, etc., have been trending down for a while. There might be a spurt one quarter due to a low base, but trends are markedly lower than in the earlier period in 2013-14. Lately, even consumer sentiments seem to be dipping as consumption levels in several segments have fallen substantially,” states Alok Sheel, professor, RBI chair, Indian Council for Research on International Economic Relations.

Experts say these challenges can be overcome. Some of them are old legacy handed over to the Modi government, while a few are outcomes of the mess created due to policy decisions like demonetisation and GST. Both these policy decisions continue to have far reaching impact on crucial sectors like agriculture and MSMEs, both of which are major employment generators.

While global economy picked up after 2014-15, in India things have been sliding since then. “We need predictability in policy making now to attract investment, which is down. The ratio of gross fixed capital formation to GDP from a peak of 35.6 per cent in 2007 slid in 2017 to 26.4 per cent, below even the level in 2003,” says Sheel, who has formerly served in key government posts, including as member of the PM’s Economic Advisory Council. “These things are not getting noticed because compared to many other economies, our GDP growth is still high. Emerging markets are also not doing well.”

N.R. Bhanumurthy, proffessor, NIPFP (National Institute of Public Finance and Policy), says even the finance ministry hasn’t acknowledged the slowdown in full. “The finance ministry (according to minutes on its website) still feels there is only a little bit of fluctuation and that we are still set for higher growth. This shows we are still to accept that there is a slowdown and that we are going to grow at less than 7 per cent for next couple of years,” he says.

He stresses that revamping the overall statistical system should be the first step towards reform. “The whole problem in policy making is due to a weak and controversial statistical system. There are many issues like GDP, poverty estimate etc.—their numbers don’t give a proper picture. I think it is the biggest issue now and the government should come up with credible data to find the correct path,” says Bhanumurthy

In February, the World Bank said in a report that investments of 4.5 per cent of the GDP will allow developing countries achieve their infrastructure related Sustainable Development Goals. The Ministry of Commerce and Industry claims India is spending 9 per cent, double of what the World Bank has prescribed. If the governments infra investments are so high, why is the private sector sentiment still low?

According to rating agency CRISIL, a material ramp-up in government spending in the past few years has meant the share of private investments in infrastructure has fallen to a decadal low of around 25 per cent in the fiscal year 2018. The share which averaged 37 per cent between fiscals 2008 and 2013 fell 600 basis points between 2013 and 2017 as a number of stalled projects and stressed assets dampened investor interests.

Mahesh Vyas, managing director and CEO of Centre for Monitoring Indian Economy Pvt Ltd, points out that the problems were different pre-2014. Initially the problems were to do with raw material supply—gas, iron ore, coal—besides land acquisition problems. Then there was policy paralysis. After that, 2014-15 was a drought year so the following year was difficult, after which demonetisation happened in 2016, while 2017 saw the rollout of GST along with its associated problems in the implementation. “The cumulative effect of all these things has brought us to where we are today. Things will not turn on their own so the new government will have to make the right moves with creditable ministers at the helm of affairs to improve the business sentiments,” says Vyas. “If the new government can get private investment going, then many other problems will get solved. There is the problem of the fiscal deficit, which is going to be very large. It could be more than four per cent. The fiscal deficit depends on how and what you are counting.”

D.K. Srivastava, chief policy advisor, EY India, too feels that the fiscal deficit could be as much as 3.7 per cent or 3.8 per cent, more than the government’s revised estimate of 3.4 per cent of the GDP. “In effect, the government will not have much space for the desired fiscal stimulus to address the broad-based demand slowdown which is reflected in all high frequency indicators. In terms of monetary policy options, there has already been a two-step reduction in the repo rate but the economy has not responded so far,” he says.

Looking beyond the headline numbers on investment, Pronab Sen, programme director, IGC India Programme, states that corporate sector investments have been going up over the last couple of years whereas almost all the decline in investments was essentially due to the MSME sector. In the national account, there is an item (savings by households in physical assets) which does not show up on the investment side but shows up on the savings side. This has two broad components—retail and housing loans and borrowings by MSMEs, “which have declined precipitously to half of what they used to be”, states Sen. “The crisis in the MSME sector was not getting reflected in the GDP data because it got extrapolated using the corporate sector data, under the assumption that everything was going fine as the corporates were doing well. What was overlooked was that as the MSMEs were not doing well, it was impacting employment, so new consumers were not coming into the market. Eventually, that has spilled over to the corporate sector as well,” says Sen.

While mooting innovative ideas for attracting priority investments, Vyas feels the government should initially “focus on a few important battles and issues so that the rest falls in place. It is important to woo the private sector back into investment as only then will anything happen in manufacturing besides infrastructure and agriculture”.

According to market experts, the government and private investment on infrastructure has come to 72:28, while till a few years ago, it was 55:45. Is this a successful financing model? Experts feel it will further strain public financing options. The government has tried new financing models like Hybrid Annuity Model (HAM) and Toll Operate Transfer (TOT) to revive private interest or get investors but after a successful debut, these also seem to have failed.

Shashikant Hegde, director and CEO, Projects Today, states that intensions for asset creation increased at a healthy rate in the government sector during the last five years ending 31 March 2019. Barring the power sector, new investment intensions by the private sector too increased at a reasonably healthy rate during the same period. “But the worrying factor was the continuous fall in the pace of project execution. The overall project implementation ratio which was hovering at around 41 percent during March 2014 came down to around 33 percent by March 2019,” says Hedge. “Private project promoters went slow on implementing projects due to falling demand and lack of funds. Further, fresh investment in the MSME sector was hit by demonetisation and GST.”

Jagannarayan Padmanabhan, director at CRISIL, says the hike in land acquisition costs has increased the project costs substantially as the land rates are 2.5 or 3 times of what they were earlier, thus impacting projects. “The private sector has shied away from investments. It unsustainable for the government to continue such huge spending. They have done it for some years and it was good for the economy, but it will eventually put a strain on the government’s financing institutions,” says Jagannarayan, stressing that the new government needs to get back private sector investment at any cost.

This is easier said than done as the banks have been sitting on bad loans worth over Rs 9 lakh crore, while loans worth Rs 3.5 lakh crore run the risk of turning sour along with the rising NBFC mess. Stressing the need to clean up this financial mess by giving RBI an upper hand, Bhanumurthy says, “The challenge is to restrain further crisis in banking and non-banking sectors. The government must check the spread of the financial crisis to other sectors.”

Amid elections, the PM’s economic panel advisor Rathin Roy in an interview to NDTV set an alarm off by stating that India is heading towards a “structural crisis”. According to Roy, India is heading towards a “middle-income trap” where a country loses its competitive edge in the export of manufactured goods because of rising wages. As a result, such economies are unable to keep up with more developed economies in the high-value-added market.”

Many share the view that Indian exports could gain if they become more competitive. But much hinders this goal including fluctuation in the rupee to dollar exchange rate. The real exchange rate has appreciated by about 15 per cent in the last few years.

Vikram Murarka, founder and chief currency strategist at forex advisory Kshitij Consultancy Services, is optimistic that the rupee may outperform some of the other currencies, especially the Chinese yuan this year. “Rupee is in an uncertain place and could move in either direction. On the positive side, it may benefit from the US and China trade war and be seen as a safe haven among emerging markets. On the other hand, there is the danger of any conflagration in the Middle East taking the crude oil to levels of $80 per barrel in which case the rupee may weaken.” The crude prices are more benign for India now than they were last year. This works to the advantage of the new government as it would ease the subsidies burden.

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