Arun Jailtley mentioned that the United Progressive Alliance (UPA)’s fragile economy is on fast track now. The Central Statistics Office (CSO) forecast of Gross Domestic Produce (GDP) growth on the eve of 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 Micro, Small and Medium Enterprises (MSMEs) are yet to get their deal. All the goods carriers from the North-East to down south Kerala move without any check-post hurdles and the elimination of palm greasing has caused a saving of nearly Rs30,000 crores for various companies. Indirect tax reforms through GST, with all its initial hiccups, is still saddled with glitches. Tax compliance has moved up an inch on direct taxes although only 1.2% of the tax filers paid taxes.
The Ease of Doing Business (EODB) ranking of the World Bank scaled up from the low of 142 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 a lakh of shady companies beingderegistered. Several directors of such companies were also blacklisted.
Coming to growth of the economy, in spite of the National Agriculture Market (e-NAM) and Minimum Support Price (MSP) changes, better monsoon and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), CSO statistics on the farm sector show a slow 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 the Services sector grew 8.3% as against 7.7%, the US revising the H1B Visa norms has caused tremors. 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 has been growing alarmingly fast. Another fast moving track is inflation, triggered by food prices and oil prices at 4.88%.
Strangely, bad banking and good economy seem to be travelling together. Non Performing Assets (NPAs) in banks have been soaring alarmingly (Rs10 trillion approximately, as this figure fluctuates with every passing day) in spite of periodical reviews and supporting initiatives by the government. Ever since the days of Garibi Hatao, banks are used to pressures from the governments. But what was restricted to 33-40% 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 piece. The government has failed to realise this. The best skills of lending for priority sector have aged and have been edged out. Government has to pump in more capital as the owner of public sector banks (PSBs). It has no option.
Strange arguments are surfacing that the depositors have to pay for the safety of their monies deposited 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 of their customers. All said and done, the deposit insurance amount has not increased in 25 years from Rs 1 lakh. The finance minister must incorporate into the Bill provisions that ensure safety of deposits, as he promised on the floor of the Parliament. Depositors who are already paying huge penalties for not maintaining minimum balances in their sevings accounts and senior citizens who have very few safe options and liquidity for their deposits, will thereby have peace of mind.
Reforms are necessary but such reforms need not result in creating ‘too big to fail’ entities in insurance and banking. These reforms should be implemented 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 one of the few fastest growing economies. States will certainly add their best to the spending spree. Therefore, caution is likely to go to the winds. Institutional reforms and 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.
(Dr B Yerram Raju is an economist and risk management specialist.)
