For a mid-term review under 'Modicare', it is hard to paint a concrete macroeconomic picture.
Evaluating the first quarter GDP estimates (2016-17), as the latest data available on the Indian economy for a mid-term review under ‘Modicare’, it is quite hard to paint a concrete macroeconomic picture. The emerging picture is rather dichotomous, with certain sectors registering considerable growth, such as electricity and coal, while others, especially mining, agriculture (rice, coarse cereals, and pluses) showing a negative trend. The GDP growth number of 7.3 percent as a whole is irreconcilable, considering a languishing rural economy and persistent inflationary trends, according to Mr. M. R. Venkatesh, author and politico-economic analyst.
Initiating a discussion on “Mid-term Review of Modinomics” at the Chennai centre of Observer Research Foundation, Mr. Venkatesh commented that it is quite difficult to defend or critique “Modinomics” unless it is clearly defined. For the majority who cast a ‘vote for change’ in 2014, “Modinomics” meant a tectonic shift, a quantum leap in the way the government functioned. While there exists several interpretations (of Modinomics), more or less they all converge on one common theme — ‘big bang’ reforms in policy and governance.
Assessing the growth story of the past two years, further supported by the first quarter data (2016-17), it is evident that what has transpired is gradual incrementalism, read otherwise “Business as usual.” The radical transformation that was espoused in the early months (in 2014) has given way to tepid growth largely aided by a favourable external climate (low oil prices and global dollar glut), Mr. Venkatesh said.
Venkatesh shared his views and apprehensions also on GST. He said that GST, touted as the largest reform package, has been heavily front loaded and oversold. The claim that GST is set to increase growth by two percent is highly questionable. While it is true that GST may reduce the effective tax rate on several goods, it will also bring goods produced by the MSMEs (daily consumables) into the tax purview, most of which were earlier outside the tax regime. Services which are widely consumed will incur 18 percent or more tax. Effectively, GST will have an inflationary effect on the economy in the initial years.
Also, the concept of having different GST rates for different classes of goods will negate the positive effects the bill was expected to have on the logistics sector. Different rates will ensure continuation of border check-posts that will prolong journey time and may result in further process and procedures. Despite having a robust IT platform at launch, processing crores of invoices (input tax offset) will test the digital bandwidth on offer and may bring with it several operational and technical challenges.
In this regard, Mr. Venkatesh also pointed out that as per the Constitution, the Supreme Court has the first and final right to hear any dispute between a state and the Centre. This challenges the dispute resolution mechanism promised under the GST Act. Additionally, in the case of GST, states have voluntarily abdicated their right to tax, which is a fundamental structure of the federal polity (under separation of powers), as defined in the Constitution.
Commenting on the state of the economy, Mr. Venkatesh said that several sectors have performed well under the NDA government. Average road construction has increased to 30 km/day from the measly 3 km/day during the UPA regime. Seamless coordination between the coal, railway and power ministry has alleviated coal and power shortages.
Production of coal is up and the electricity sector has seen a significant boost. Other sectors that showed healthy growth were sale of vehicles (13 percent), consumer durables, and tourism. Most importantly there has been no serious charges of corruption against the government at the ministerial level, though handful charges have been reported in the bureaucracy.
Despite the good show in select sectors, all is not well. Quoting figures from the recently-released first quarter data, Mr. Venkatesh noted that growth in agriculture, forestry, mining, construction, fishing and other primary sectors were abysmal at 1-1.5%. In the first quarter, rice production has gone down by -7.7%, wheat up by 8.1%, coarse grains and pluses down by -9.7% and -4.2% respectively. In the energy sector production of crude and petroleum is down by -3.3% and -6.1%, while mining and quarrying grew by -0.4%.
Also, freight traffic net tonne/km has come down by 8.8%. Overall primary sector growth has been tepid indicating stagnant or deteriorating rural incomes, thereby questioning the veracity of the 7.3% growth figure which does not add up to reflect the sector wide performance numbers.
Plotting the primary sector figures against the political economy, Mr. Venkatesh commented that unless rural incomes rise, it would be impossible to achieve the targeted 6-7% growth. Prime Minister Naredra Modi-led BJP’s 2014 voting pattern showed a rural and backward class advantage. While the urban middle class formed the party’s major vote base, it was the rural votes that broke BJP’s decade long impasse. Rural economy revival is equally important from a political viewpoint for the NDA.
Speaking on industrial and private sector growth, Mr. Venkatesh said that investment cycle has not picked up. Interest-coverage ratio of major corporates was poor, including a few negative EBITA companies. NPAs are on the increase and nearly 60% of private sector companies are non-bankable i.e. unworthy of additional bank-credit.
While there maybe a few miscreants, many of these companies have been unable to service their debt owing to genuine reasons — stalled projects, pending environmental clearances, and bureaucratic hurdles. NGT and SC verdicts in the past few years has compounded this situation by placing an outright ban on continuation of several projects.
Gross capital formation has dipped by 3% to 4% owing to reduced savings that could be attributed to the low interest rates that do not reflect the inflation. Capital goods sector has been declining year on year by 18% to 20%, which is not a good sign, observed Mr. Venkatesh.
Dropping tax revenue
Enumerating the pain points, Mr. Venkatesh listed dropping tax revenues (owing to tepid growth), over reach of enforcement directorate especially under the PMLA (prevention of money laundering act) to detain genuine cases, and SEBI’s extended powers and increased scrutiny forcing heavy overhead on companies as major factors that contributed towards investment uncertainty.
Venkatesh concluded the interaction by charting out a few recommendations, liberalisation of FDI must be followed up by the removal of FEMA (forex management act), said Mr. Venkatesh. Instead, the government must setup a Foreign Investment Security Act, to ensure proper due diligence in ascertaining ownership structures that may have strategic implications for India (ex. Hutch telecom, Huawei).
Secondly, bureaucratic hurdles and redundant regulatory institutions must be consolidated to streamline process and procedures, this will ensure that “Make in India” succeeds. Finally, India must have a well defined Forex management policy, this will significantly de-risk the manufacturing sector by protecting them against currency gyrations.
This report is prepared by Deepak Vijayaraghavan, associate at Observer Research Foundation, Chennai.