Legacy of the Past: A Complex Economic Puzzle

I partly differ with Mr. P. Chidambaram’s views in his article – ‘Across the aisle: Clueless in New Delhi’, written in The Indian Express on 17th September, 2017. The credit flow is impacted mainly due to the mounting NPAs of the banks which is a legacy bequeathed by the UPA government.

This is majorly on account of cost and time over runs in mega infra projects and bottlenecks in coal allotment and the reasons are obvious. Delays in implementation of major infrastructure projects has led to Rs. 524.45 billion (bn)  escalation in their original cost estimates from Rs.1452.71 bn to Rs.1977.16 bn as on 31st May 2012. And this legacy continues as under.

Cost escalation in central infrastructure projects (projects costing Rs. 1500 million and above)

Period Total No. of Projects No. of stalled projects Original cost (INR) Revised estimates (INR) Net increase in cost (INR) Percentage of upward revision
30th August, 2014 720 295 5488 bn 6053 bn 1015 bn 18.5%
31st December, 2014 738 315 9776 bn 11848 bn 2072 bn 21%
31 st December, 2016 1186 287 14600 bn 16264 bn 1664 bn 11.39%

(Source: Ministry of Statistics and Programme Implementation.)

Yes, the implementation of demonetisation and GST were done in a hurry and the Government has certainly put the cart before the horse. These measures are the efforts of the government in integrating the informal economy with formal economy which involves structural adjustments, and in the transition period the economy is bound to slow down.

The government has stated that 91 lakh people have been added to the direct tax net post demonetization. As the GST revenue collections in its first month (Rs. 92,283 Crores in July, 2017) indicate, the new GST regime could be at least revenue neutral, if not revenue enhancing, in the fiscal 2017-18.

Net direct tax collections grew by 17.5 percent to Rs.2.24 lakh crores during April-August, 2017. This is 22.9 percent of the budget estimates of direct taxes for the total financial year 2017-18, according to the finance ministry. Hence, the overall tax collections are expected to be higher in 2017-18 compared to the previous year.

Therefore, terming demonetization as a misadventure is not correct if one looks at the long term impact in expansion of the tax base and expected tax revenue accruals. The economic survey says the number of taxpayers increased 45 per cent in 2016-17 as an effect of demonetisation, compared to 25 per cent rise in the previous year.

The statement of Mr. P. Chidambaram, GST, a good idea, was translated into a flawed law that suffered from bad and hurried implementation, and affected many industries in the manufacturing sector” is valid only in the short term scenario during the transition phase. It is a flawed law because it needed the consensus of all the states and each state has its own unique problems in tax collections and not to mention about their state fiscal deficits.

We had to ‘hurry’ in implementation of GST because the 16 year long wait for a tax reform measure is unreasonable by any standards. Such a massive tax reform measure when introduced across the country is bound to have teething problems. However, I agree that the operational issues after the launch of GST are proving to be major irritants to the indirect tax payers.

Nevertheless, going by the trend of the GST collections during the fiscal 2017-18, the first year will certainly be revenue neutral and likely to yield higher revenues in the coming years. The issues with regard to tax slabs for various goods and services and the items currently not covered under GST like petroleum products, alcohol and electricity will be resolved over a period of time once the states are in a position to clearly assess the impact of GST on their state revenue collections.

However, the fact remains, as Mr. P. Chidambaram says, the government appears to be clueless in finding the causes for the slowdown of the economy which obviously leads to unemployment concerns. In my view the causes could be – stalled and delayed mega projects, mounting NPAs and credit aversion by banks – a vicious cycle, a bit difficult to break and its obvious outcome is unemployment.

Earlier we had and still continue to have one vicious cycle in rural economy- poverty, illiteracy and ill health – and thanks to the policy paralysis during the last ten years we have succeeded in now adding one more vicious cycle in urban economy as mentioned above.

To break this vicious cycle we need to kick start the economy by infusing activity in stalled and delayed mega projects. As a first step, policy measures are needed from the government to remove the hurdles and effective co-ordination between the concerned government ministries/ departments or agencies.

The PMG (Project Monitoring Group) was  set up in January 2013 as a secretariat to the cabinet committee on investments to resolve the pending issues and to track the progress of projects of the size of Rs.10 bn and above in both public and private sector. The PMG should also include members from the Industry, RBI / Banks and the concerned Central / State Government agency so that all major stake holders of the projects are taken into confidence and the accountability is fixed with regard to stalled and delayed mega projects.

The second step is a one-time major relaxation of the NPA norms by the RBI so that this will enable the banks to lend afresh to revive the stalled and delayed mega projects. The NPA Ordinance passed in May 2017 gives greater powers to RBI in swiftly dealing with the NPAs of the banks.

12 large NPA accounts constituting 25% of the stressed accounts identified for resolution under the Insolvency and Bankruptcy Code are likely to be resolved in a time frame of 270 days. However, these 12 NPAs once fully liquidated may impact the bottom line of the lending bankers leading to capital adequacy issues.

When these two measures are done in tandem, employment will pick up in the industrial and infrastructural sectors significantly as these measures are expected to revive the economy.

Simultaneously, the government should take steps to infuse additional capital by either pumping in more equity or the banks should raise additional equity from the capital markets. Weak balance sheets may not fetch banks the desired premium while raising funds through capital markets. Therefore, the government will have no choice but to pump in additional equity in the near future. In view of this back ground, the efforts of the government to disinvest its stake in public sector banks also may not be successful.

Of course, the economic activity will pickup in 2018 since the government will spend more keeping in view the ensuing elections in 2019. The expanded tax base will help the government to improve tax collections of both direct and indirect taxes in 2018-19 and it is most likely that the government will make the middle class population happy by reducing the tax rates or giving tax exemptions in its 2018-19 budget (election budget).

Next year, if the oil prices increase it will lead to increase in inflation. But this may not happen since the crude oil inventory of US is likely to increase and therefore the overall increase in crude oil prices may not significantly impact Bharat’s economy.

Bharat’s share in world exports in 2013 which was 2.07% declined to 1.65% in 2016. Considering Bharat’s GDP growth during 2013-14 to 2015-16 which was 6.6% (2013-14), 7.2% (2014-15) and 7.6% (2015-16) one has to admit Mr. Chidambaram’s statement on decline in Bharat’s exports.

In this context I would like to quote WTO Director-General Roberto Azevedo who said on 12th April, 2017, “Weak international trade growth in the last few years largely reflects continuing weakness in the global economy. Trade has the potential to strengthen global growth if the movement of goods and supply of services across borders remains largely unfettered.  However, if policymakers attempt to address job losses at home with severe restrictions on imports, trade cannot help boost growth and may even constitute a drag on the recovery.”

The WTO is forecasting that global trade will expand by 2.4% in 2017; however, as deep uncertainty about near-term economic and policy developments raise the forecast risk, this figure is placed within a range of 1.8% to 3.6%. In 2018, the WTO is forecasting trade growth between 2.1% and 4%.

Probably, weakness in the global economy and restrictions on imports by the countries who are major trade partners of Bharat could be one of the reasons for this decline in Bharat’s share in world exports (a detailed analysis needs to be made on this point by the government). A long term strategic vision and collaborative approach by External Affairs Ministry and Ministry of Commerce and Industry are needed to leverage on Bharat’s foreign relations and convert it into tangible benefits in foreign trade.

Conclusion

To counter some of the economic challenges mentioned above, if the government is able to pump in significant equity into public sector banks and the banks are able to resolve their major NPAs through the fast track mechanism, then we can expect better credit inflow into the economy (credit flow).

To boost private sector investment the government should focus on stalled and delayed mega projects to kick start the industrial and infrastructural growth. If this starts happening at least by March 2018, then we’ll have better chances of economic growth (private investment).

The capex plans of Indian Railways, the Sagar Mala project involving upgradation and expansion of the sea ports, and developing industrial corridors in the hinterland should move from the blueprints stage in board rooms to ground level activity in a year’s time to give the much needed push to the economy (government’s capital expenditure).

The year 2018 is also likely to witness stepping up of government expenditure in view of general elections. The tax sops expected in the election year is likely to improve the private consumption.

The Demonetization and GST will not give immediate short term gains but will give benefits in the long term (provided the operational issues are resolved swiftly). These measures will first lead to structural adjustment that is painful during the transition time but will give long term benefits. The penalty tax on black money identified, assessed and settled (after disputes through tribunals, which may take time) will be a bonus to the government in the long run.

Yes, the government is clueless about the causes of the slow down because the causes are not only many but have become complex, a legacy inherited from the past and therefore the government is still perplexed. However, we are a nation of people who are highly tolerant, patient and optimistic about the future. We have waited for 70 long years and would not mind waiting for a few more years for the ‘Acche Din.’


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About the Author

B.N.V. Parthasarathi
Ex Senior Banker, Management and Financial Consultant, Visiting faculty at premier B Schools and Universities. E mail- [email protected]