Fragility to fast track?

Reforms are necessary but should be done with caution and calibration, and not emotion

By Author B Yerram Raju   |   Published: 22nd Jan 2018   12:01 am Updated: 21st Jan 2018   10:19 pm

Finance Minister Arun Jaitley recently mentioned that the UPA’s fragile economy is on fast track now. The Central Statistics Office’s forecast for GDP growth before the ensuing Budget 2018-19, however, is 6.5%, the slowest in the last four years. So, what has moved fast?

The presenting of Union Budget has moved from March-end to February. The Insolvency and Bankruptcy Code has completed its first anniversary. All the goods-carriers from Northeast to down South Kerala move without any checkpost hurdles and palm greasing, saving nearly Rs 30,000 crore for various companies.

Indirect tax reforms through GST continues with glitches. Compliance moved an inch up on direct taxes although only 1.2% of the filers paid taxes. But the MSMEs are yet to get their deal.

The Ease of Doing Business ranking of the World Bank scaled up from a low 142 in 2014 to 100 in 2017 with several States also improving their rankings. The first rank was retained by Telangana for the second year in succession in 2017. The Insolvency and Bankruptcy Code Act and the Real Estate Regulation reforms significantly contributed to this ranking. Companies cleaned up post demonetisation with about lakh of shady firms being removed from registration. Several directors of such companies were also blacklisted.

Hope Afloat

Coming to the growth of the economy, CSO statistics of the farm sector shows in spite of e-NAM, MSP changes and better monsoon, the Pradhan Mantri Bima Yojana slowed down to 2.1% in 2018 from 4.9% in 2017. Industry grew 4.4% correspondingly as against 5.6% earlier. Gross fixed capital formation almost doubled from 2.4% to 4.5%. The hope for sustainable growth in manufacturing kindled with the third quarter (2017-18) looking up in manufacturing and infrastructure.

Though services sector grew 8.3% as against 7.7%, there are tremors with the US revising the H1B visa norms. Several software firms gave exit-slips to their employees. The base salaries of most leading software companies have almost halved from what they were a decade ago.

Private consumption expenditure denoting demand moved up from 6.3% to 8.7% while that of government consumption expenditure increased by only 8.5% as against the previous year’s 20.8%. Yet the fiscal deficit crossed the threshold 3.2% by the end of the third quarter of the year! Negative employment growth is alarmingly moving fast. Another fast-moving track is inflation triggered by food prices and oil prices at 4.88%.

Untackled Menace

Bad banking and good economy seem to be strangely travelling together. NPAs in banks have been surging alarmingly (approximately Rs 10 lakh crore as this figure is very dynamic with every passing day) in spite of periodical reviews and supporting initiatives by the government. The untackled menace rests upon banks slowing down banking and moving fast on third-party product sales triggered by hefty commissions. Even P-Reviews of banks spend more time on third-party business than deposit and credit growth.

Ever since the days of Garibi Hatao, banks are used to pressures from governments. But what was restricted to 33-40% of credit has moved to 75% of credit. Short-term resources are used to lend for long-term purposes with little credit appraisal skills for such long-term projects.

Universal Banking is the real villain of the peace but the Government has failed to realise it yet. Skills for lending for priority sector have aged. The government has to pump in more capital as the owner of PSBs. It has no option.

Safe Options

Strange arguments are surfacing that the depositors have to pay for the safety of their monies with the banks in the wake of Financial Resolution and Deposit Insurance (FRDI) Bill. The prices for deposits include the price for safety as well. Since such safety is restrictive in cooperative banks, the latter pay higher interest on deposits that their customers keep.

All said and done, the Deposit Insurance did not move a paisa up from 1984. It is enough if the FM includes in the Bill whatever promises he made in Parliament. Depositors who are already paying huge penalties for not keeping minimum balances in the savings accounts and senior citizens who have very few safe options and liquidity for their deposits will have peace and sleep in comfort.

Reforms are necessary but such reforms need not result in creating ‘too big to fail’ entities in Insurance and Banking. These reforms should be done not with emotion but with caution and calibration.

Less Caution

Global economic headwinds on growth are uncomfortable at the moment with uncertainties in the oil and commodities markets. Luckily, we are still among the few fastest growing economies. This year’s Budget, preceding the election year will have more to spend. States will certainly add their best to the spending spree. Therefore, caution is likely to go with the wind.

Institutional reforms, closure of unviable PSUs, including even the PSBs, will improve the credibility of the government. But the interests of employees should also be fully accommodated.

(The author is an economist and risk management specialist)