By Sanjeev Ahluwalia
It’s scarier going downhill than climbing to the top. Whilst on the way up, the heavyweight of inertia is known and hence manageable. Going downhill, inertia accelerates descent in unknown ways.
The economy is no different. Flab (public sector banks), poorly maintained brakes (uncompetitive private firms), worn gear cogs (lack of structural reforms) or inadequate signage (sticky real interest rates) can all accelerate an uncontrolled descent.
Luckily citizens are resilient. They fend for themselves, preserve their meagre resources, huddle defensively and sit out a storm. This trait explains the lack of demand today. People are hunkering down for the storm ahead.
The largest insurance system in India is the Indian family. Our House Hold savings rate is down to 17 per cent of GDP in 2018-19 from 23 per cent in 2012-13 because neo-middle class families are using their surpluses to keep jobless relatives afloat whilst the middle class and the rich are licking their wounds from stock market and realty losses.
Indian corporates – “organised” and “unorganised” are a pampered lot. Over the past two decades, they have revelled in negative or rock bottom real interest rates and “administered” rather than commercial lending practices. When Modi 1.0 unleashed determined efforts to clean grand corruption, the shutters came down on cosy past practices and bankruptcies multiplied.
Uneven performance in the public sector and poor accountability provides a low threshold against which private entities benchmark themselves, particularly in regulated businesses like banks, insurance, food, fertilisers, electricity, transport, health, education and logistics. Per RBI 2019, bank fraud takes between two to four and one-half years to be identified! No Prime Minister, since Independence, has spent mind-space or political capital on improving government performance – a structural reform numero uno on the to-do list.
Banking reform is another paused play. What the Finance Minister gave us on August 30, 2019, was an eyewash – the merger of ten publicly owned banks into four merged megabanks – Punjab National Bank, Canara Bank, Indian Bank and Union Bank of India.
In February 2019, Dena Bank and Vijaya Bank were merged into Bank of Baroda (BOB). Since then the BOB share price is down by 10 per cent whilst the BSE BANKEX increased by 3 per cent till August 29, 2019. The new mergers might similarly destroy market value. The Finance Minister assured there would be job losses from the mergers, possibly to avoid a confrontation with the employee unions. Savings from employee redundancies is the standard benefit from corporate mergers in the private world.
Merging bad banks into good banks merely masks the poor performer from public scrutiny by making the balance sheets fungible. However, minority shareholders of the better performing banks could rightly protest at being made to bear the burden of the dead weights in quality of assets, managerial capability or corroded management culture. Three-fourths of mergers do not succeed and if they do it is only over the medium term. So, don’t bet on the 12 remaining public sector banks achieving uniform star performance level any time soon.
Far more encouraging are the liberalised FDI norms for single-brand retail for making India a competitive market place and initiatives to pull “marquee names” and investment into the manufacturing sector. Also, the flight of around US$3 billion of investment funds from the market has collaterally benefited us by reducing the value of the Indian Rupee to more realistic levels. However, it still remains grossly overvalued; hurts exports at a time when overseas markets also face a slow-down and privileges imports over domestic manufacture – particularly in the low-value consumer durables produced by the small and medium sector. It is better to avoid a strong Rupee than to have to put up tariff walls to “protect” narrow domestic manufacturing interests, which risks degenerating into cronyism.
We were also shackled by relative flat-footedness with respect to proactive monetary policy in a low inflation environment – an economic environment unfamiliar to us.
The silver lining is that cleaning up financial and investment regulations can pull in Foreign Direct Investment on an unprecedented scale and import corporate governance on par with international standards.
FY 2019-20 has started badly with growth slipping to 5 per cent in the April to November quarter. More pain lies ahead. The question is on whom shall the burden of reduced public expenditure fall? Clear-headed and pragmatic budget reviews can improve fiscal re-allocation towards human development, social protection, basic infrastructure and external and domestic trade logistics.
In fiscal terms this means opening your purse selectively to expand rural employment and enhance rural (not just farmer) welfare through MNREGA; Direct Income Support and liberalising agricultural trade whilst continuing the existing support schemes (administered cereal procurement, subsidised fertiliser, cheap irrigation) till growth raises all boats.
Union government allocations for completing existing projects should be a privileged whilst slowing expenditure, in the short term, on integrating next-generation technology – solar power, electric vehicles, urban renewal, space capability, interlinking of rivers. These are plumbing tasks, which the bureaucracy excels at. A high-level committee of Secretaries can finesse the required expenditure rationalisations.
State governments would have to similarly cut expenditures since the volume of grants from the Union would reduce. There is limited scope for borrowing to spend. The FY2019-20 fiscal deficit (FD) target of 3.3 per cent is already challenging as is the net tax mobilisation target of a 20 per cent increase over the actuals for FY2018-19.
The FM has rolled back the recently introduced super-rich surcharge. Rationalised GST tariffs – particularly doing away with the exorbitant 28 per cent rate slab will benefit manufacturers and urban consumers. Further reduction in the interest rates for home and durable loans, cash credit and overdraft can expand demand for services, agricultural products and manufactured goods.
Reworking the budget framework is necessary. Higher growth with fiscal instability is not a choice. Fine-tuning the level of debt we can add beyond the FD target should be a collaborative effort across the Union government, state governments and the RBI. Pulling out “co-operative federalism” from the attic and putting it to work on tax rationalisation, land, labour and agricultural reforms might reverse the slide.
This commentary originally appeared in The Times of India.