In February this year, when Finance Minister Arun Jaitley presented his budget, he spoke of how India was about to take off on a faster growth trajectory again.
At the start of 2015, global investors were betting big on India. Economic forecasters and agencies were competing to either revise growth projections for India or to maintain it at a time when China – the global economic powerhouse — was slowing down and when many economies were struggling. Then there were the 14th Finance Commission’s recommendations which led to a record devolution of resources to states that were supposed to further boost growth.
Performance disappointing? Given the level of expectations, especially after a couple of wasted years for the economy, the overall performance may have been disappointing. Much of that may have to do with the fact that despite enjoying a windfall in the form of low global oil prices and the gains from it (savings on imports specially) on the ground, private investments which have fuelled growth in the past haven’t picked up.
Corporate balance sheets which have been stretched are still in need of repair with the top ten infrastructure groups loaded with debt and banks struggling to clean up with over 10 per cent of their outstanding loans classified as bad loans. That’s a big worry as you need these banks to fund growth when a recovery happens down the line- now rendered more challenging with low nominal GDP growth because of low inflation making it more difficult for firms to handle their debt burden.
‘And as global growth and trade remain moderate, another driver of growth – exports — will continue to be negative, something which RBI Governor Raghuram Rajan had flagged long ago when pitching for what he calls Make in India or to cater to a domestic market.
Tax collections have been buoyant but without the levies on oil, it would have been a different story, exposing the activity in the manufacturing sector where there is under utilisation of capacity. But foreign direct inflows have been good though there have been net outflows of portfolio flows. A big disappointment has been in terms of realising money from stake sales – with another fiscal year closing in when markets were headed North during the early part of the year.
However, there have been gains or positives. Macro-economic management has been good, reflected in indicators such as a low current account deficit, a well performing currency, adequate foreign exchange reserves of over $ 350 billion, relatively low inflation at below 6 per cent and expenditure under relative control.
Some of the promises have also been kept like in the case of the introduction of new legislation on bankruptcy to ensure faster closure or exits of unviable firms or quicker asset sales and a bill on Goods and Services Tax which got derailed– and a road map for lowering corporate tax over the next four years from 30 to 25 per cent which is expected to kick in from next fiscal.
Spending on roads appears to be on track and also by the railways – the impact of some of which will seen over the next year or two. The move towards direct benefits transfer also appears to be on course.
Why 2016 is critical That’s why 2016 will be critical from a long term view as two legislations – GST and the Bankruptcy law — can lead to significant changes in the way business is run in the country, add to efficiency and compliance besides boosting revenues. Getting these two reform measures through will be a major feat, and could be game changers later as could be small banks licenced this year.
This government has been supremely lucky with oil prices remaining low and a very orderly interest rate increase by the US Fed and its outlook for next year. But the additional boost it received of over 1 per cent because of it may not remain long. Private investment also may take longer and there are the Pay Commission recommendations to be implemented next year.
In February, Jaitley had said that the government had re-established India’s credibility on the economic front and the world was predicting that it is India’s chance to fly. Investors, businesses and individuals have been patient so far but that is wearing thin. This government has been fortunate that the external environment has been benign and that overseas investors still have a lot of faith. Another wasted year and that will erode.