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Issue No.: 576 | June 2015
 

NDA’s Management of the Economy – More of the Same

Ranga Kota
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A large number of NDA’s claimed success stories are made out of tweaking several initiatives or ideas of previous governments, of complying with judicial intervention and directives, and of unexpected largesse in terms lower international oil prices and reduced gold imports.

As the Modi-led NDA celebrates its first anniversary in power, there is not much euphoria in the country. Nothing much significantly changed on the economic landscape. Continuation and conclusion of initiatives of the previous government are broadly the dimensions of management. No quantum jumps and no breakaway ideas. 

The government was lucky as the international commodity prices, chiefly the crude oil, took a south ward journey soon after it took charge, providing it with better fiscal space in terms of fuel subsidies and falling inflation.

The corporate and middle class wager on NDA is still on. How long will it remain is any body’s guess. The Government Likes CSO Arun Jaitley must be eminently pleased with the CSO for giving a boost to the GDP growth. All the numbers, we hear of late, are all based on the revised methodology of calculating GDP. These numbers can differ significantly from old set of calculations. If Jaitley is pleased with 7.4% GDP growth number for the FY 2015, he should compare this with 6.9% GDP growth under Chidambaram in FY 2014. If all the excellent economic management, claimed by NDA government, could only add half a percentage point to the GDP growth in FY 2015, the government needs to be concerned. If FY 2016 posts a GDP growth around 7% due to rural distress, in two years of NDA‘s rule, the Indian economy will have remained stationary. The 6.9% GDP growth during UPA‘s last year is never mentioned as often as 7.4% of NDA’s first year for obvious reasons. You compare only when it helps you. Otherwise you ignore.

It would be interesting to know from experts what the revised GDP growth numbers of UPA’S would be like if they were calculated on the basis of revised methodology. Obviously, the NDA Government will not be pleased with such an exercise. But, the nation would like to have this information to scrutinize the GDP growth numbers of NDA government.

Stock Markets Take a Breather

Not too distance ago, some stock market players were predicting sky was the limit for Sensex. Sold on Modi’s magic, the BSE Index went from 22000 to 29000, gaining over 7000 points between April 2014 and Feb 2015. The February, 2015 budget was hailed as brilliant by a large section of India INC. Now, the pundits are at as loss to explain the loss of momentum on Indian Stock Exchanges since the budget.

Everyone knows that the Indian stock markets are over dependent on FIIs and the latter can change their investment options in emerging markets depending on their perception of returns. The FIIs are finding in recent times a few other emerging markets more attractive. This reflects their assessment of Indian economy in the near term.

The below par corporate results in the first quarter of 2015 only suggest corporate earnings are stretched on a weak consumer demand and on a higher leverage. Corporate performance in the last one year has not shown any significant improvement. What propelled Sensex to move up by 7000 points in a year when nothing much seems to have changed in the corporate sector makes one wonder whether markets sometimes become over exuberant. The recent downward correction on the stock market reflects a changed assessment of Indian economy going forward.

"Make in India” – a Long Shot

Manufacturing makes sense only if the manufacturers make money. Manufacturers have to have a growing demand both internally and externally. Demand is a function of economic conditions and incomes of people. We have seen, over the last couple of years, a weaker growth in the domestic demand for a variety of products. Besides, China with its low price proposition is cutting into the domestic manufacturers’ share in a variety of products. Indian steel industry, which depended on growing Chinese market in boom days, finds itself at the receiving end over the last year.

Adding to manufacturing sector woes, the export market is not providing any opportunity for growth. Export performance over the last three years has remained stuck around USD 300 bn. The corporate sector blames high domestic interest rates as the reason for the subdued domestic demand, The Rupee appreciation against few international currencies other than USD is held as a reason for the sluggish export performance.

While one can debate reasons for its listless performance, the fact remains that we are unlikely to see a dramatic turnaround soon in the manufacturing sector. A significant reduction in domestic interest rates could kick-start much needed growth in domestic demand. The corporate sector would first use the surplus capacity and cash on higher price realizations. The international economic situation outside the US, and plummeting revenues of oil rich nations do not augur well for a steep rise in the export performance in near term. Hence, there is no compelling reason for the corporate sector to step up investments in Indian manufacturing any time soon. One more year of average performance of manufacturing sector would make the promise of jobs for millions lose more sheen for aspiring middle class.

Banking on Infra Growth

If manufacturing is unlikely to add to growth, government has to invest huge sums in infra projects. Except in national high ways, Railways and Ports (air/sea), the central government has very little role in deciding on a large number of infrastructure projects and their pace of development in civilian sector.

States have a significant role in pushing infra projects in areas like urban transport, power, water, irrigation, mining, smart cities and housing. The Indian private sector is not willing to involve in infra funding in a big way, learning from its past mistakes, where unsustainable debt, land acquisition, regulatory clearances and tariff regulation delayed projects and made them unviable. The state governments are strapped for cash. Borrowing is an option. But some states like Punjab and West Bengal are carrying huge debts and might find it difficult to raise resources for huge infra. Therefore, a big push from states to infra in short term is unlikely to materialize.

This leaves the centre to do the heavy lifting. The central government is keen to provide more spending thrust from the budget. Also, it does not mind raising resources through debt. If the investments are in technological up-gradation, rolling stock or modernization of exiting railway infrastructure, government can target accelerated finishing lines. But, for green field projects, where land acquisitions and environment clearances become necessary the government could run into a wall.

Development Land Locked

Even if we assume that the environment ministry will tweak its rules to facilitate clearances for mega infra projects, it is the land acquisition battle that is fought on the ground that will test the NDA government’s ability to push infra on a mission mode.

The fate of USD 12bn Korean steel project (POSCO) in Odisha and of Tata Motors’ Nano project in West Bengal would suggest that sustained opposition to land acquisitions could kill projects over time. These projects were conceived before the much criticized UPA‘s Land bill was passed in the parliament. A few amendments to the land bill might win some brownie points for NDA government, but will not give it a blank cheque. It will be more like UPA’s attempt to pass the bill of 51% FDI in front end retail. They won the battle in parliament at a great cost. The courageous deed of UPA carried no punch with world big retailers as the bill had a few conditions that were difficult to comply with.

The NDA government is already on the back foot with the amendments to land bill of UPA. It knows that pushing it too hard will only reinforce the emerging image of this government as anti-farmer and pro-corporate. Dumping it completely will affect the image of the PM adversely. It will get passed, in due course, in some form. But, it would do no wonders to the land acquisition. It will end up as a mere Pyrrhic victory for the government.

Not Much Infra Dividend to India Inc.

There is no doubt that a stepped up investment in infra-structure will offer great opportunity for manufactured products like steel, cement, construction machinery and rolling stock. Considering the present state of the Indian manufacturing capability and its competitiveness, a large part of the dividend will go to companies abroad. The solar industry is a case in point. The Indian solar panel manufactures are crying hoarse about Chinese dumping panels at prices the Indian makers cannot match. The solar power producers want to import cheap panels to ensure their projects meet competitive tariffs for solar power. The NDA government has a difficult choice to make, if it opts for make in India.

In some cases, there is no choice to be made. India does not make them. Nuclear reactors will be from foreigners. Most of metro rail coaches will be from abroad. Even steel might get imported for these projects. The size of gains to Indian corporate sector from government’s infra push is difficult to assess and a lot depend on the Government policy on import policy and tariffs.

Struggling Services Sector

There is an increasing concern about the future growth of the Indian IT and financial services which led a robust Indian service sector growth over the past several years and contributed to a major part of Indian GDP growth story. Some people are predicting that the best for the Indian IT is already behind and we see a slower growth in this sector. The below par performance of Indian IT majors in the first quarter of 2015 is seen as a pointer. Though the prospect of huge domestic market for IT emerging is a positive, the earnings from the domestic market will take a long time to match the current international revenues. A slow growing IT sector is a problem for job creation for lakhs of engineering students that pass out from colleges every year. Besides, the sector over the next few years might shed considerable jobs which will have lost relevance in changing the IT market.

The financial services ride on the real economy. If the real economy does not fire on all cylinders, the financial sector growth gets affected. We have seen over the last few years, banking sector suffering from a high level of non-performing assets and a low credit growth. The banking sector loaded heavily with the public sector banks will have to get their balance sheets in order to raise more capital from the public as the government is not keen on providing any succour to the struggling banks. This again will have an implication for creation of large number of jobs for people.

Do the Same but Claim More

A large number of NDA’s claimed success stories are made out of tweaking several initiatives or ideas of previous government, of complying with judicial intervention and directives, and of unexpected largesse in terms lower international oil prices and reduced gold imports.

The diesel price deregulation was not a bold initiative as claimed. The previous government by April 2014 brought the diesel price very close to its market price, through a very intelligent process of increasing its price, beginning in January/February 2013, in instalments of 50paise per litre per month. The NDA government, preferred to continue this gradual increase. As luck would have it, the international oil prices have started declining in the second half of 2014, making government’s job easier in decontrolling diesel prices.

The Insurance Bill is nothing new and in works for several years. Jan Dan Yojana is rebranding of financial inclusion concept of the previous government. Vidya Balan was on the air for quite some time promoting toilets, before Swachh Bharat Abhiyan campaign made a much bigger noise. Make in India is another name for UPA’s National Manufacturing Policy first announced in October 2011. Direct Benefit Transfer scheme is just an expansion of UPA’s trial run with it. The GST bill is the culmination of efforts and concessions made by Pranab, Chidambaram and Jaitley stretching over several years. The Coal auctions were mandated by the court. Any government of the day would have followed the process. Spectrum auctions are a mere continuation from the past.Increases in FDI limits in railways and defence projects drew on the previous Government’s ideas/initiative. Aadhar, sans legal sanction, is a continuation of a legacy from the previous government.

But, this government is active on optics and sound bytes. It projected the conclusion of each one of above is their success story. Besides, there is an obliging press to buy the government’s economic success story for better part of the year. It is only, of late, the press is becoming critical of the government, aided by the respected people like Deepak Parikh and Arun Shourie.

Headwinds Stare Government

The recent upturn in international oil prices forced the government to make upward corrections recently in petrol and diesel prices which are now market determined. If the international oil prices move further up – a likely prospect – the government will find the domestic oil prices going up in tandem. The government claimed all the success for lower oil prices. It will have to take the flak for the rising fuel prices. The rising oil prices will add to inflation.

The other head wind will be the below normal mason predicted by the Met. If monsoon is inadequate this year the rural distress might prove a daunting challenge to the government. Lower grain output in the second year in a row could raise prices of agricultural products with the attendant jump in food inflation.

These head winds have a potential to affect any significant recovery in the economy this fiscal. The NDA may celebrate its first year in government on an imagined sense of high. But it enters the second year confronting the challenges of depressed agricultural sector, yet to recover manufacturing, struggling services sector and an infra push that could trip on lack of resources and delays in land acquisitions. Besides, there are not many legacy ideas or initiatives remaining, which this government could convert into its success story.

The miraculous powers of this government are suspect. We have not seen any economic miracle so far; whether we see a few in the future, only time will tell. Meanwhile, the promise of Achhe Din is on hold.

MR. RANGA KOTA is an adviser to Clearsep Technologies (I) Pvt. Ltd, Mumbai and an 
independent consultant in the logistics and supply chain area. 
Email: rkota123@yahoo.co.in

 
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