The Indian economy is currently in a paradoxical situation. The world has been praising India for its rapid economic growth, inflation is down, forex reserves are more than $400 billion, fiscal deficit is on target and current account deficit until recently has been less than 1% of GDP and comfortably financed by capital inflows.
India’s oil imports in FY13 was $164 billion and by FY17 it was only $83 billion, thereby lowering the current account deficit as a percentage of GDP from 4.8% in FY13 to just 1.1% in FY17. The lucky government has also had two straight years of good monsoons. However, both the supporters and detractors of the present government have described the state of the economy as ‘sinking’ and as being ‘in a tailspin’, etc.
The stock market is at an all-time high in anticipation of a surge in earnings which is yet to materialise. The newly appointed head of the NITI Aayog, Rajiv Kumar, has been refreshingly honest in admitting that lack of investment and anaemic job creation are significant challenges for this government.
The RBI, in its latest monetary policy report, lowered the projected growth rate for FY18 from 7.3% to 6.7% and, more importantly, reserved its opinion as to whether the marked consecutive dip in growth rates for the last two quarters was a blip or not. So, what’s going on? Politically, the government is on the defensive. But, it has so far refrained from taking hasty and populist spending decisions.
Going by the hefty anecdotal evidence available, both the demonetisation episode of 2016 and the introduction of GST in July have imposed short-term costs in the form of lowering of growth rate in the current fiscal.
But it must be told in the same breath that the culture as well as the regime for direct and indirect tax compliance in India is undergoing a fundamental shift for the better in a way that has not happened before. This is certainly going to expand the ‘production possibility frontier’ of the economy. However, there is uncertainty on how fast this is going to happen. A lot will depend on follow-up policy actions on the part of the government. The equity market seems to bet the recent downward growth rate trend is just a blip.
Our diagnosis is, the lack of speedy resolution of the stress in PSU banks and corporate balance sheets has eroded business confidence leading to lower investment and poor job creation. The government announcement of a stimulus package may deal with the problem cosmetically rather than address it at its root. The current government has shown limited appetite for serious financial sector reform.
It has been long on rhetoric such as ‘Indra Dhanush’ and has evinced little resolve to deal with the massive non-performing loans problem.
The recent RBI move to refer large stressed accounts to the National Company Law Tribunal so that they could be dealt with under the Insolvency and Bankruptcy Code will likely lead to two consequences: One, the resolution will take a very long time, and two, recoveries will be much lower than what would have been possible by way of one-time payments that could have been negotiated with delinquent borrowers for full and final settlement of dues.
The aim to ring-fence boards and executive of PSU banks from probes by the three Cs, CBI, CVC and CAG, will impose a cost on the economy by delaying resolution of distressed loans and causing more losses to PSU banks. A decisive break from the shackles and shibboleths of the past is needed in respect of PSU bank policies.
The high savings in India are currently not directed to productive, long-term investments as corporates have still not been able to repair their balance sheets.
Further, that intangible thing called “confidence”, be it consumer or business, has been faltering. In fact, the Dun and Bradstreet composite CFO Optimism Index which takes into account the overall financial and macroeconomic conditions has declined to a five-quarter low, slipping to 11% on an annual basis and by 5.7% on a sequential basis.
The AC Nielsen Consumer confidence index for India in Q2 2017 was 128, declining 7 percentage points compared with Q42016, while global consumer confidence rose 3 percentage points during this time interval. Despite the fall, Indian consumers are still the second most optimistic among the 63 countries surveyed by AC Nielsen.
The table captures the real interest in India (calculated as the difference between the yield on the 90-day Treasury Bill and consumer price inflation) which is currently hovering around 4%. Against the backdrop of a perceptible decline in the investment rate in the recent quarters and given such high real rates, it would be irrational to expect investment to pick up in an environment where earnings growth has also been elusive. What needs to be done now to get India back on the high growth track? We recommend a five-step plan:
First, demonetiation was politically successful but an economic failure. We can use the current crisis to introduce an amnesty scheme, a la Indonesia, to allow tax payers to voluntarily disclose hitherto undisclosed income kept domestically and abroad. Indonesia — a nation of 250 million people, with 32 million registered tax payers but only 8.9 million actual tax payers — had close to 1 million people disclose $365 billion (40% of GDP) of undisclosed income this year, the bulk of which was held domestically and a portion abroad, notably $55.5 billion in Singapore.
The Indian government should announce a one-time programme valid till December 31, by when anyone can disclose previously undisclosed income held within the country and abroad, for which they will pay a small, one-time fine of 4%, while 50% of the domestic holdings (100% of foreign cash/ near cash holdings) will need to be invested in two large government funds — one for infrastructure and the other for bank recapitalisation.
The amounts thus invested will be locked for seven years with a compound interest of 4% per annum. Post redemption, the amounts and the interest thereon can be used freely for any lawful purposes in India.
While scheme will be generous, come January 1, criminal prosecution should be instituted against Indian residents holding large sums of undisclosed income. This government has built some credibility to pursue cases of high-profile corruption. By highlighting the automatic exchange of financial account data with nations such as Singapore and Switzerland, it can ensure that the scheme is taken seriously.
The work done so far by the SIT on money stashed abroad and the information obtained through Panama leaks could be a good input to test and start the scheme. After all, this government had made the bringing back of black money kept abroad as one of its core election promises. Now it needs to walk the talk.
Second, ensure that the full extent of the NPA problem is recognised latest by December 31 and that banks make necessary provisions in this regard. The consequent shortfall in equity capital adequacy for PSU banks should be met through recapitalisation by March 31.
The boards of PSU banks should be recast by bringing in persons with demonstrated professional experience and achievement. The selection of CEOs of PSU banks and determination of their tenure and compensation package should henceforth be the exclusive domain of their boards.
Boards should be fully empowered decide on loan resolution by way of real restructuring, with or without haircut, and one-time payment. All cases of suspected wrongdoing involving collusion between borrowers and banks in loan resolution should be screened and vetted first by a high-level committee of former bankers drawn from public and private sectors before being taken up by the 3 Cs. Clear guidelines should be established for such screening and vetting.
Third, accelerate infrastructure investments, especially in agricultural storage/ support infrastructure, in post-harvest processing, water efficiency technologies, extension services etc. to make agriculture more productive.
Fourth, facilitate new export engines — ‘Make in India’ and ‘Serve in India’ — with emphasis on defense exports and medical tourism. An ambitious target of $100 billion over the next 10 years can be set for these two segments as the world is becoming an increasingly dangerous place and global population less healthy with chronic diseases for which India can offer holistic cures.
Lastly, the PM must take a leaf from the book of former Prime Minister, Narasimha Rao, who was heading a minority government. Despite its existence on the edge, he dared to bring in a technocrat at that time — Dr. Manmohan Singh — to launch economic reforms. That was statesmanship. Mr. Modi needs fresh and bold economic thinking to steer the future of 1.3 billion aspiring Indians and the next big battle for the ballot in 2019.
(Sivaprakasam Sivakumar is MD, Argonaut Global Capital and Himadri Bhattacharya is senior advisor, Riskontroller Global. Views are personal)