I have admired the swift rise of Mrs Nirmala Sitharaman from party spokesperson (2010) to Commerce Minister (2014) to Defence Minister (2017) and to Finance Minister (2019). At every rise she broke a glass ceiling. That should encourage more women to prove that they are not less capable than men.
No Finance Minister (FM) starts on a clean slate. The slate is always full of writing — some helpful, some harmless, some a headache and some a hindrance! The former Chief Economic Adviser, Dr Arvind Subramanian, has cast a shadow on the growth numbers and has, in a way, concurred with the long-time critics of the methodology employed to calculate the GDP. It is too late to repent. Leaving that aside, the place to start is to take stock of the economic situation without a pre-disposed mind. Here are some facts and indicators.
Low inflation, but slow growth
* Inflation is low. WPI is at 3.07 per cent and CPI at 3.05 per cent. Low inflation is due to an over-tight monetary policy and low commodity prices, but both are changing.
As long as inflation is low, government expenditure can be increased, but is there money?
* Growth slowed down rapidly in 2018-19. In the four quarters, it was 8.0, 7.0, 6.6 and 5.8 per cent. It will probably decline further in April-June 2019. Anticipating a downtrend, RBI has lowered the forecast for 2019-20 to 7.2 per cent.
* The farm sector grew at 2.9 per cent in 2018-19. Agricultural wages grew at 4.64 per cent in 2018. Over 10,000 farmers commit suicide every year. In Maharashtra alone, 808 farmers have taken their lives so far in 2019. Farmers will not brook neglect any longer.
* Investment is the prime driver of growth. In 2018-19, FDI inflows into India declined for the first time in the last six years, falling by 1 per cent to USD 44.37 billion. Gross Fixed Capital Formation was 29.3 per cent (current prices) last year. Promoters are loath to invest because capacity utilization has been low: e.g. in manufacturing, it was 76 per cent.
* Foreign Institutional Investors (FII) pulled out money in 2018-19. Net FII last year was USD (-) 3,587 million.
* Manufacturing is in a slump. Between 2015-16 and 2018-19, the growth rates of IIP for manufacturing were 2.8, 4.4, 4.6 and 3.5 per cent.
Now, vehicle manufacturers have reported declining sales and have cut back production.
* Merchandise exports, under NDA, crossed the level achieved in 2013-14 (USD 315 billion) only in 2018-19. Unfortunately, protectionism is on the rise and trade/tariff war is in the offing. The new fiscal has started poorly with merchandise exports in April at only USD 26 billion.
* The health of the banking sector is poor. Gross NPAs at the end of March 2019 stood at 9.3 per cent of outstanding loans and a humongous sum of Rs 5,55,603 crore has been written off by banks since April 2014. In the second term, the FM cannot blame the UPA government (as her predecessor was wont to do) for the woes of the banking sector.
* Bank deposits are growing at 9.4 per cent, but credit is growing at 13.1 per cent. RBI has cut the policy rate and wants banks to cut interest rates for borrowers. Banks will not cut rates for borrowers unless they can also cut rates for depositors, which will hurt deposit growth. There is no easy solution.
Worrying fiscal situation
*The trade deficit was USD (-) 176.42 billion in 2018-19. This is putting pressure on the Current Account Deficit (CAD) which was USD (-) 51.8 billion in the nine months ending December 2018. The CAD is a number watched by analysts and currency traders. The FM too should watch it.
* Tax revenues took a big hit in 2018-19. The revised estimates (RE) for 2018-19 made on February 1, 2019, have turned out to be a joke. Total tax revenues were Rs 13,16,951 crore against the RE of Rs 14,84,406 crore — a loss of Rs 1,67,455 crore. Obviously, the FM cannot stick to the Interim Budget Estimates for 2019-20 and has to present completely new estimates. Not a happy start.
* During the 5 years of NDA, the fiscal deficit (FD) was compressed by only 1.1 per cent. Massive expenditure cuts were made in January-March 2019; otherwise, the FD would have been 4.1 per cent in 2018-19, not 3.4 per cent. If fiscal consolidation remains a prime objective of the government, the FM has to do a fine balancing act between revenue (more without hurting) and expenditure (less without offending).
* Unemployment was the topmost concern of the people, yet the voters in most states voted the BJP back to power. The issue will come back to haunt the government. The FM’s maiden Budget will be judged by its potential to revive economic growth and create jobs. On employment, the FM should not fall for the temptation of quoting the numbers of Mudra loans, Uber drivers and EPFO enrollments. The only reliable measure of unemployment is the Periodic Labour Force Survey. The FM should remember that the unemployment rate is 6.1 per cent, the highest in 45 years.
Mrs Nirmala Sitharaman inherited the present economic situation. She deserves our best wishes and all the luck in the world.
This article first appeared in the June 16, 2019 print edition under the title ‘The economy that she inherited’