The exuberance triggered by the Narendra Modi victory seems to have somewhat discounted the considerable bumps lining the way for the new government to script a turnaround in the Indian economy.
The banking sector is wobbly, considering that the gross bad loans of 40 listed Indian banks grew to Rs 2.43 lakh crore by December 2013, and that over 51 per cent of the banking sector NPAs can be tracked to stalled projects in sectors that include infrastructure, iron & steel and textiles. The power sector continues to struggle for fuel and a majority of the non-pithead projects commissioned after March 2009 operating at below optimum capacity, the consumer-level impact of which has been cushioned somewhat by a sharp drop in industrial demand in the last 12 months.
Delays in adding new mines and expanding existing ones have made India the third biggest importer of coal, even though it sits on what BP ranks as the world’s fifth-largest reserves. Then there are dozens of highway developers seeking postponement of premium obligations after having made over-ambitious traffic projections, and sectors such as steel, auto and cement struggling to optimise even existing capacity. Private sector players are grossly overleveraged, considering that borrowings by 10 leading Indian business groups have seen their liabilities rising six-fold over the six years ending March 2013 to touch Rs 6.31 trillion, or close 35 per cent of the gross bank credit outstanding from scheduled commercial banks to large industry. Structural issues include a difficult land acquisition legislation. Added to all this is the threat of rising inflation combined with sluggish industrial output, something that could only get worse with a weak monsoon projection.
The bar of expectations has been raised so high that the privilege of time, which a rescue act by the new government justifiably deserves, may be cut short. Quite on the lines of the experience of Modi’s ally of sorts, Japan’s prime minister Shinzo Abe, who took charge less than two years ago in September 2012. The financial markets swooned over Abe when he announced his three-arrow strategy last year for ending his country’s two decade struggle with deflation and tepid growth. Share prices soared and the yen fell after the new government pledged large-scale quantitative easing, higher public spending and structural reform in a package dubbed ‘Abenomics’.
The enthusiasm has progressively been fizzling out. The Abenomics-fuelled rally was largely dependent on purchases by overseas hedge funds, whose hopes for Abe’s economic program have mostly been dampened by now. Japan’s latest GDP figures, which showed a sharp drop in the rate of expansion, was yet another dampener, which has added to the view that Abenomics is more hype and less substance. All in the span of just around two years.
Anil is a senior editor based in New Delhi.