Words speak louder than action. The Finance Minister was loud and clear so that the message will reach not-too-distant Gujarat. He said, “We will provide Rs 2,11,000 crore to re-capitalise public sector banks; and we will implement a new programme, BharatMala, on an outlay of Rs 5,35,000 crore and build 34,800 km of roads.”
He also said, “The economy is on strong macroeconomic fundamentals”, and added, almost apologetically, “And where we have identified the need for a boost, in relation to that we have taken some decisions.” The Secretary, Economic Affairs, chimed in: “India grew at a very strong pace of 7.5 per cent in the three years of 2014-17.”
If the economy is on strong macroeconomic fundamentals and is growing at 7.5 per cent, it does not require a boost! A boost to such an economy may prove inflationary, push up the fiscal deficit, worsen the current account deficit and so on. Obviously, there is something wrong in the diagnosis.
The diagnosis is at variance with that of most economists and with the CSO’s numbers. Let’s keep the views aside and focus on the numbers. The sequential quarterly growth rates of GDP since Jan-March 2016 have been 9.1, 7.9, 7.5, 7.0, 6.1 and 5.7 per cent. The economy is, therefore, not growing at 7.5 per cent. It was growing at a brisk rate but was derailed, and it has been decelerating since April 2016. That is the first flaw in the diagnosis. The second and more serious flaw is not identifying the causes of the deceleration.
Saint Thiruvalluvar said:
Noi nadi noi muthal nadi athu thanikkum vai nadi vaippa cheyal
(Make a careful diagnosis, discover the true cause, think of the proper remedy and apply it effectively)
A careful diagnosis would have revealed that the proximate causes were the sputtering engines of private investment, private consumption and exports. The two decisions of the government will have little impact on the sluggish engines of growth.
Recapitalisation not panacea
Recapitalisation of banks is good in itself and I welcome it. Due to write-offs, banks’ capital has been reduced. There will be more write-offs as 12 companies have been referred to insolvency resolution and more cases are likely to follow suit. Recapitalisation will help banks maintain their capital adequacy ratio. Banks’ capacity to lend will increase, but that does not mean lending will increase.
No entrepreneur believes that the situation today is conducive to start or expand a business. (Notice that the government no longer speaks of ‘ease of doing business’!) Unless private investors discover their appetite for making more investment (including investing their own money and borrowing from banks), merely recapitalising banks will not re-start private investment. The paramount need is to boost investment in small and medium enterprises (SMEs). Banks lend to SMEs only about 10 per cent of their credit needs. Recapitalising banks will make little difference to the dire situation of SMEs.
Besides, there are downsides to the government’s proposal. The government will issue bonds, banks will subscribe to the bonds, and the government will invest that money in the same banks as equity! It is a case of ‘rob Peter to pay Peter’! As a consequence, the fiscal deficit limit will, in all likelihood, be breached, resulting in its own adverse consequences.
Recapitalisation is a half-reform done three years late, as pointed out by the Chief Economic Adviser on October 25. According to the CEA, it has to be accompanied by — I would say preceded by — banking reforms and tough governance standards. Read Part III of his speech. There is no word from the government on these concomitant reforms.
Road Scheme Mere Announcement
The other proposal is to build 34,800 km of roads. This number includes 10,000 km already under the National Highway Development Project. The rest is distributed among economic corridors, feeder routes, efficiency improvement, border roads and coastal roads. There are several steps before work can start on any new road — prepare DPR for each road project, get environment clearance, acquire land, bid out the project, tie up financing, fix the toll etc. No significant part of the 34,800 km is likely to be started or completed in the next 18 months.
There are many other things the government could have done. It could have declared it will never again indulge in reckless adventurism like demonetisation. It could have brought in a group of outside experts to quickly fix the mess created by the hasty implementation of the flawed GST. It could have promised to rescind the draconian amendments made to the tax laws and the excessive powers given to tax officials.
It could have promised to rein in the investigative agencies that have struck terror among business persons. None of the above seems to be of interest to the government. Instead we have jumlon ki baarish (a shower of promises). Let’s brace ourselves for jobless growth and despondency among the youth.
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