Fragility to Fast Track?

Arun Jailtley mentioned that the UPA’s fragile economy is on fast track now. CSO forecast of GDP growth on the eve of the Budget 2018-19, however, is 6.5%, the slowest of the last four years. What has moved fast?

Union Budget presentation moved from March end to February end. Insolvency and Bankruptcy Code completed its first anniversary. But the MSMEs are yet to get their deal. All the goods carriers from North East to down South Kerala move without any check post hurdles and the palm greasing saving nearly Rs.30000cr for various companies. Indirect Tax Reforms through GST with all its initial hiccups is still with glitches. Tax compliance moved an inch up on direct taxes although only 1.2% of the tax filers paid taxes.

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

Coming to growth of the economy, CSO statistics farm sector, in spite of e-NAM and MSP changes, better monsoon, PJBMY, slowed down to 2.1% in 2018 from 4.9% in 2017. Industry grew 4.4% correspondingly against 5.6% earlier. Gross fixed capital formation almost doubled from 2.4% to 4.5%. The hope for sustainable growth in manufacturing has been kindled with the 3rd 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 chits to their employees. The base salaries of most leading software companies have been almost halved from what they were a decade ago. Private consumption expenditure denoting demand also 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% and yet the fiscal deficit has crossed the threshold 3.2% even by the end of the third quarter of the year! Negative Employment growth has been alarmingly moving fast. Another fast moving track is inflation triggered by food prices and oil prices at 4.88%.

Bad banking and good economy seem to be travelling strangely together. NPAs in Banks have been surging alarmingly (Rs.10trillion approximately 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 in banks slowing down on banking and moving fast on third party product sales triggered by hefty commissions such business that makes the salaries a low fixed pay. Even P-Reviews of banks spend more time on third party business than deposit and credit growth sectorwise.

Ever since the days of Garibi Hatao, banks are used to pressures from the governments. But what was restricted to 33-40 percent of credit moved to 75% of credit and short term resources were used to lend for long term purposes with little credit appraisal skills of such long term projects. Universal Banking is the real villain of the peace. Government still failed to realise this. Best skills of lending for priority sector have aged out and edged out. Government has to pump in more capital as the owner of PSBs. It has no option. 

Strange arguments are surfacing that the depositors have to pay for safety of their monies with the banks in the wake of FRDI Bill. The prices for deposits include the price for safety as well. Since such safety is restrictive in cooperative banks, the later 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 on the floor of the Parliament. Depositors who are already paying huge penalties for not keeping minimum balances in the SB accounts and senior citizens who have very few safe options and liquidity for their deposits will have peace at home 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.

Global economic headwinds on growth are uncomfortable at the moment with uncertainties on the oil, and commodities markets. Luckily, we are still the few of the fastest growing economies. This year’s Budget preceding the Election Year will have more to spend on less-accountable. States will certainly add their best to the spending spree. Therefore, caution is likely to go the wind blows. Institutional reforms, closure of unviable PSUs that should include even the PSBs will improve the credibility of the government when the interests of labour/ employees are fully accommodated after due discussions with them. 

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