By S Sethuraman
It takes two finance ministers, original Arun Jaitley, convalescing after surgery, and “interim” minister Piyush Goyal (who is digging deeper and taking total command), rivalling each other to tell us that the economy is growing nicely, fiscal targets would be met and the crisis in banking system is getting disentangled. The reality is otherwise.
Whatever Jaitley may think of, Goyal has also talked of setting up of a bad bank mechanism to take over part of the non-performing assets of over-stressed public sector banks, totalling over Rs.one lakh crore and also promoting some mergers among them. These may be old ideas brought to the fore again and likely, as before, deferred for future.
Jaitley had himself authored the bankruptcy code and provided sizeable funds for part recapitalisation of select banks. But Goyal must be wanting to be seen as pro-active and trying out new ideas, given the low morale of the Modi Government at present on a wide front.
Meanwhile, for his part, Jaitley in his Facebook post announced the impending resignation of Chief Economic Adviser Arvind Subramanian. There were highly laudatory references on both sides. The suddenness of the move by CEA makes for a murky background. Economists have rated high Subramanian’s annual economic surveys and he also coined the ‘twin payments problem’ involving the banks and the highly leveraged corporate sector.
The circumstances surrounding Subramanian’s decision to quit and the manner of its being announced have led to questions on stewardship of the Finance Ministry at present,
Politics apart, after the series of bypoll losses, the Prime Minister’s anxiety to remain in the saddle post-2019 is palpable, given the failed job and other expectations of the aspirant sections and the added-on distress of farmers and ill-treatment of Dalits at the hands of the Sangh Parivar in many BJP-ruled states.
But Prime Minister Narendra Modi is not the one to give in, in any confrontation, though he may also be at his wit’s end.
India has run into systemic problems in securing macro-economic stability. On the banking front, there are no quick fixes. The government and the RBI are groping for durable solutions which would help stabilise the functioning of public sector banks and it may take several months before the banking system can resume its traditional role of lending for productive purposes.
The Prime Minister had declared himself a ‘vikas purush’ and has maintained whatever he says or does is for development. But the four-year record of the Modi government has not added lustre to governance, which had remained focused more on seeking popularity for combating corruption and ending black money.
The blitzkrieg in nationwide advertisements of achievements has had no visible positive impact for the Modi government, with little to show in terms of outcomes of welfare-oriented programmes in the name of the Prime Minister.
No wonder, at the recent Niti Aayog meeting with chief ministers of states, Modi changing track preferred to get ideas on holding simultaneous elections to Lok Sabha and state Assemblies as well as on what it takes to achieve double digit growth. India’s growth record under the Modi government has been relatively modest, going down to below 7 per cent for two years as the economy had to recover from the shock of demonetisation and the hurried introduction of VAT.
India’s economy had the promise of fastest-growing one but it had been performing below its potential and over the last four years, private investment did not revive. As the economy enters fiscal 2019, with the first quarter ending in June, there is a sudden shift in the global economic momentum.
World oil and metal prices have already risen, US Federal Reserve has revised its fund rate to around two per cent and further hikes are scheduled later in 2018. The dollar has been rising and there has been large outflow of foreign funds from emerging market and other developing countries, including India and Argentina.
A robust growth, globally forecast at around 3.5 per cent, could see a reversal as trade wars are breaking out among major economies (including G-20 nations), triggered by the Trump Administration levying huge tariffs on Chinese goods entering the American market.
China, the world’s second largest economy, is retaliating. The US Administration has also levied enhanced tariffs applicable to specific shipments from India and the European Union itself.
World trade growth, which had recovered impressively over the past two years well ahead of output growth, would again falter as leading exporters and importers sort out the consequences of the upsurge in protectionism, the unilateral moves deleterious to the survival of the multilateral trading system.
Although India was projected to recover and record 7.4 per cent growth in 2018/19, oil price rise (given our dependence on imports up to 80 per cent of needs) would not only impinge on domestic prices already on the rise but also affect the external payments position, though currently looking manageable. Without a strong revival in domestic consumption and new investments by corporates, achieving a targeted 7.4 per cent growth may prove difficult.
The Monetary Policy Committee (MPC) has noted output revival in recent quarters with investment activity beginning to recover, and says it could receive a further boost from “swift resolution” of distressed sectors of the economy under the Insolvency and Bankruptcy Code.
Geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery. (IPA Service)