Vijay Kumar Gaba: Economic recovery

Showing posts with label Economic recovery. Show all posts

Wednesday, January 20, 2021

Chronic asthmatic & diabetic, returns home after successful heart surgery

The recent macroeconomic data indicates that Indian economic activity may soon reach to its pre Covid level. The latest reading on Nomura India Business resumption Index is 93.4, just 6.6% below pre Covid induced lockdown level. The media headlines and official commentary claims it to be a “V” shaped recovery, implying that one year may have been lost, but Indian economy is nearly back to “normal”. There is section of experts which is terming it to be a “K” shaped recovery rather than a “V” shaped one; implying that one part of the economy has raced much ahead while the other continues to slide.

Some noteworthy data includes:

Fall in consumer and wholesale inflation, highlighting easing of logistic constraints. The inflation is now within the RBI tolerance band, and has prompted the governor to emphasize that surplus liquidity would need to be sucked out of the system. The very steep yield curve has started to flatten a bit.

IIP growth is now back to February 2020 level. In December, e-way bill collections rose by 15.9% to 6.42 crore in December 2020, the highest since April 2018. The mobility to work places ticked up in past 8 weeks, as shown by Google mobility index.

Though the exports have faltered in past three months, may be due to fresh mobility restrictions in major European and American economies, but imports have bounced back sharply. The sharp bounce in non-oil and non-gold imports again indicates easing logistic constraints and reviving industrial growth. The trade deficit accordingly widened to 25 months high.

Elsewhere, China has reported positive growth of 2.3% (yoy) for 2020 as a whole. UK, USA and many other European countries have seen fresh surge in cases of infection and have re-imposed some mobility restrictions, hampering the process of economic recovery. In past couple of weeks the US job data has been disappointing.

These data certainly a matter of relief. However, in no way it makes me comfortable. I know from my travels and interaction with people that for a significantly large section of population, the normalization will take years, if not decades, of “high” economic growth. Besides, the amount of stimulus that has taken to bring the economy back to “pre Covid” level may not be available to take it back to pre global financial crisis (GFC) level; exatly we want to be.

For now, Indian economy is like a middle aged person suffering from chronic asthma and diabetes, who has just returned home after a successful open heart surgery.

Tuesday, November 3, 2020

Pause before you pop up the Bubbly

There was this very famous soccer player. He was one of the main strikers for his country as well as club team. He won many matches for his teams. He was very popular amongst sports enthusiast, and as such attracted many corporates to become brand ambassador for their respective products. Unfortunately, one day he met with a serious accident in which many of his limbs were fractured. He remained in intensive care for many months. Doctors had to perform several surgeries to keep him alive and make him walk again.

After spending two years in bed, the striker took his first step with the assistance of his wife and walking stick. The hospital management immediately broke the news to the media. The fans were ecstatic and celebrated the news by popping up champagne and ringing church bells. The doctors informed the team management and sponsors (who were keeping a close watch on the health conditions of their star striker), in confidence that their star would never be able to play again and need a stick to walk for rest of his life. They were obviously not as happy as the family members and army of fans. They also knew it well that the fans will hardly take any time in forgetting this star, once they know that he is not stepping on the filed again.

Recently, the finance ministry, informed the media that GST collection crossed Rs1trn mark after eight months, as the consumption in the economy picked up ahead of the festive season. The financial media highlighted this piece of information and presented as a definite sign of economic recovery. The financial market participants received the news enthusiastically and celebrated it by writing buoyant reports of an imminent economic revival.

The finance ministry however did not specify that in each of past two years, the GST collections have failed to meet the budget estimates and this year also there is no possibility of budget estimates being achieved. For past many months the state governments have been at loggerheads with the central government over the issue of GST compensation. The government has been drastically cutting spending on consumption as well investment to save the fiscal conditions becoming unmanageable that could trigger a rating downgrade and panic reaction from foreign investors. In September Government spending was just Rs2.32trn vs Rs3.13trn (yoy).

One can understand the enthusiastic response of traders to each bit and piece of data improvement, but the moot point is whether the investors and businesses should also be celebrating it! This question is pertinent to answer, because the fact is that the Government of India has indulged in the fiscal repression of worst kind, when the states world over unleashing fiscal stimulus of unprecedented proportion.

As per some reports, “Centre will earn an additional Rs 2.25 lakh crore from new taxes on petrol, diesel and other fuels imposed since lockdown began. This is despite global crude prices touching record lows.” It may bbe recalled that the Centre has increased excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol during lockdown besides increasing road cess on fuel by Rs 8 per litre. State governments have also increased their value added taxes on fuel to make up for revenue loss amid the COVID-19 crisis. The additional tax on fuel is estimated to be 50% more than the GST revenue lost during April – October 2020. If we add to this the additional taxes imposed on alcohol etc., the figure of additional taxation would be much higher than the revenue lost due to lockdown. This is fiscal repression of unsuspecting people, who are still under the impression that the spending cuts etc. are due to shortfall in tax revenue.

The fact is that Indian economy (striker), which was one of the major drivers of global recovery post 2008 global financial crisis, is on crutches. There is little visibility that it will become driver of global economy again in next 3-4years at least. The team management (businesses) and sponsors (investors) may have little to celebrate in the monthly GST or auto sales numbers. Traders (army of fans) may though pop up champagne to celebrate Diwali.

Wednesday, April 29, 2020

COVID-19 is once in a century event, accept it

As per some media report, the government of India is considering a proposal to revive the struggling MSME sector. It is reported that the government is considering building a contingency fund of Rs400bn that will be used to provide guarantee to Rs3trn of fresh loans to MSME sector. Earlier, the RBI had proposed a moratorium of 3 months on the repayment of principal and interest on the terms loans. Presently, banks have an outstanding credit of Rs15trn to MSME sector. Now it is indicated that each MSME will be extended additional credit equivalent to 20% of the outstanding credit for 6 months period to kick start their locked down businesses. This additional credit facility shall be fully guaranteed by the central government.

"If" "implemented" "simply", without too many conditions and restrictions, it would be a meaningful measure to mitigate the collateral damage caused by coronavirus COVID-19.

I would like to share the following thoughts with readers in this context:

(a) The present crisis is once in a century kind of event. In fact this shall qualify to be the most impactful global event since the WWII. The government must handle this event likewise. Considering and implementing some incremental solutions for mitigating the impact of this event will not help in any manner.

The government therefore must not pay any heed to the fiscal hawks cautioning it about fiscal slippages. The government must constitute a special fund, by issuing 30-50yr maturity bonds in the global markets (given the near zero interest rates) and utilize that money for reconstruction and growth of the economy. This fund could be excluded from the regular annual budget. Repayment could be funded by Rs1/ltr cess on transportation fuel for next 30years.

(b) One of the primary obstacles in revival of the Indian economy is poor risk appetite of bankers. For a variety of reasons, bankers are not willing to assume any further risk. The government needs to provide an effective backstop to banks to encourage them for assuming risk. This will only put the wheels of the economy in motion.

(c) RBI needs to become proactive. It would need to lead the way to the economic recovery. The mandate of RBI needs to be changed from a regulator of Banks to the agent of growth with stability. During the crisis period, ensuring market stability through direct action must be a core principle of RBI policy framework.

For example, in the current circumstances, instead of expecting banks to bail or mutual funds and NBFCs might not be an effective strategy. Instead, RBI should have done a direct action by buying securities from mutual funds and NBFCs with appropriate haircuts and other commercial terms.

(d) The steps taken by the government must be wholehearted and well thought off. Bureaucracy must be given three clear instructions:

(i) The buck stops at the PMO.

(ii) The approach of the implementing agencies must be "how it can be implemented" rather than "how to avoid implementation". The agencies must be given adequate flexibility for taking on the spot decisions about relaxing the set rules.

The argument that it will be misused is invalid. If the government does not trust its own officers' integrity, either the officer or the government itself must go.

(iii) Failure to achieve the defined outcome shall attract stringent possible punishment.

Wednesday, February 5, 2020

Is government implementing reforms to cement economic recovery?

The medium term policy cum fiscal policy strategy statement, that forms the part of the budget documents states that the "Government has initiated structural reforms both on the supply and the demand side." It is argued that these structural reforms "have fiscal implications and are important tools to boost economic performance" and the "impact of these measures initiated is anticipated to have spill-over effect in the next financial year."

By implication, the government is claiming that the short term growth has been sacrificed to cement the high growth trajectory in the medium term. The statement claims that "the measures initiated by the Government to cement the economic recovery are anticipated to have effects in the next FY as well."

This leads me to revisit the debate whether the administrative changes to improve efficiency & eliminate redundancies; and incremental changes in the current practices, policies and programs could be terms as "structural reform". Besides, it is also critical to examine, whether the incremental changes made in FY20, are adequate to launch a sustained economic recovery in FY21.

As per the Macro-Economic Framework Statement for FY21, the government implemented the following measures that are claimed as "structural reforms" in the medium term policy cum fiscal policy strategy statement.

Hike in minimum support price of agricultural crops for 2019-20;
Reduction in corporate tax rate;
Policy initiatives for development of textiles & handicrafts and electric vehicles;
Outreach programme for growth, expansion and facilitation of micro, small and medium enterprises;
Incentives for start-ups in India;
Scheme to provide a one-time partial credit guarantee to public sector banks(PSBs) for purchase of pooled assets of financially sound non-banking financial companies (NBFCs);
Recapitalization of public sector banks;
Relaxation of external commercial borrowing guidelines for affordable housing;
Realty fund worth Rs250bn for stalled housing projects;
Additional tax deduction of interest for affordable housing;
Merger of 10 public sector banks into four entities;
Revised Priority Sector Lending (PSL) norms for exports;
Streamlining of many labor laws at the central government level;
Steps to boost manufacturing; employment generation; financial inclusion; digital payments; improving ease of doing business via schemes such as Make in India, Skill India and Direct Benefit Transfer; and
Announcement of the National Infrastructure Pipeline (NIP) of projects worth Rs1.02trn, which will commence in phases from 2020-21 to 2024-25.

In my view, most of these measures do not even pass the muster for being called reforms. Treating them "structural reform" would be a grave mistake.....to continue

Tuesday, December 17, 2019

The Solution lies within

Some of the headlines in yesterday's newspapers made interesting reading:

A few days ago, the finance minister had categorically dismissed the talks about changes in the GST rates. She was quoted having said that "Buzz is everywhere other than in my office". Yesterday, West Bengal Finance Minister Amit Mitra, who is also former head of GST Council and FICCI General Secretary, reportedly, wrote to the finance minister requesting, “We should not in any way tinker with the rate structure or impose any new cess at a time when the industry and consumers are going through the most distressing times with ‘stagflation’ knocking at our door (stagnation accompanies by growing inflation).” (see here) It is very difficult for a common man to assimilate, how such a senior person would write an official request, if there is no buzz around.

The commerce minister highlighted that he has taken an exercise to consult country’s top 25 corporate houses and lenders, to assess their investment plans and also try and resolve their issues that they may be facing in their bid to expand operations. The list of 25 included Aditya Birla Group Chairman K. M. Birla, among others. (see here)

The telecom minister expressed his displeasure over the comments made by the promoters of beleaguered Vodafone-Idea, in which Birla group is co-promoter. Referring to the comments made by Vodafone CEO that running business in India may not be viable unless the government helps, the minister said, “I don’t appreciate this kind of statement. Very firmly and very clearly. We have given all the opening for doing business but no one should dictate terms on us. India is a sovereign country...,” It is pertinent to note that K. M. Birla has recently echoed the views of his British partner. (see here)

Reportedly, As many as 43 out of 85 coal blocks allotted after 2015 to PSUs have yet to receive 159 clearances, mostly because allottee PSUs have not taken necessary actions. These blocks were either auctioned or allotted to public sector companies by the government following cancellation of 204 blocks, including 33 operational blocks, by the Supreme Court in 2014. (see here) Incidentally, the incumbent commerce minister was in charge of coal ministry during May 2014 to May 2019.

India now ranks much lower than Bangladesh on many parameters, including GDP growth (8.15% in FY19). The latest is the gender gap. India is now ranked 112, down 4 places since last year, in terms of gender gap amid widening disparity in terms of women's health and survival and economic participation -- the two areas where the country is now ranked in the bottom-five. Political rhetoric and shenanigans apart, Muslim countries like Bangladesh (50th) and Indonesia (85th) are doing much better than us in bridging the gender gap. (see here)

The point is that the government is obdurately refusing to accept that the solution lies within. Instead of introspecting they are relying on "experts", "vested interests" and "uninterested" for solutions. Obviously, they would not get the appropriate answers.

Wednesday, September 18, 2019

Winter of discontent

Yesterday, I made my periodic visit to the Delhi's wholesale and popular retail markets to assess the current trends and mood of the markets. A visit to markets at this point in time is important because this is the time when most of the retailers build inventory for the coming festival & marriage season which usually accounts for almost half of their annual sale.

Unlike, previous years, this time I was not expecting any surprises; and I did get none. The mood of traders as well as buyers was despondent. The following is the feedback from my rendezvous with traders in Delhi.

(a) This year the trade is marginally slower than the last year. However, many traders are expecting the declining trend of past 3years to bottom out this season. Inventories have reduced materially. Costs rationalization has been mostly achieved. GST has been imbibed completely. Integration with

(b) The wholesale trade in grocery items, especially spices &, pulses, is facing structural problems. The volume of trade is rising, but the margins are compressing. The price manipulation by hoarders and large importers has almost ended, so has the volatility in prices. The wholesalers are now keeping much lower inventory and learning to live with nominal trading margins.

The import of confectionary and dry fruits has been lower this year, a second consecutive year of decline. The import of fresh fruits and vegetables is higher as compared to the last year. The volumes are higher but margins much lower.

The working capital finance by banks and NBFCs is much tighter and expensive this year.

(c) The textile trade is slow. The rural demand from J&K, Himachal, UP, MP, Chhattisgarh and Haryana (the markets mostly served from Delhi wholesale trade) is down for second consecutive year. Besides volumes, the prices are also lower this year.

(d) Packaging material trade is also witnessing second consecutive year of contraction. The pricing is stable.

(e) The festival related demand of decorations, lighting, toys, gifts etc. is 15-20% lower as compared to past two years. The pricing is however higher as compared to last year.

(f) Electrical hardware and sanitaryware demand from retail segment is lower than last year (that was not good in itself). However, wholesale demand from realty sector seems to have picked up from last year.

(g) Bullion and Jewelry traders are expecting the demand this season to be lower than last year and appear to have liquidated some of their inventory to take advantage of high bullion prices.

(h) Retail traders were more despondent than the wholesalers. Although the buying season has not even started and this is the leanest fortnight (Pitru Paksha or Shradh) of the year, most retailers are expecting lower foot falls on their shops this year. The wholesalers believe that this pessimism is without basis and retailers may be positively surprised on demand side in next three months.

(i) The traditional markets, where many more people visit and much more business is done as compared to swanky malls in the southern parts of city, had scanty security apparatus; whereas the mall areas had overwhelming presence of security personnel. It is difficult to gauge what is primary objective of the security management by government agencies.

My overall assessment is that with little support from the government trade cycle can accelerate much faster. The steps taken so far by the government are however inadequate and mostly misdirected.

Wednesday, September 11, 2019

You must survive to enjoy the fruits of you labor!

As per the Hindu lunar calendar the ancestors' fortnight (पितृपक्ष), will start from tomorrow. As per the ancient Hindu traditions, all Hindus are obligated to serve Brahmins (Scholars) and feed crows during this fortnight. It is widely believed that serving Brahmins and feeding crows in this fortnight pleases souls of the ancestors and thus redeems the person performing this ritual from the debt of ancestors.

Hindu religious traditions also mandate that a grand feast must be organized by all Hindus within 3weeks of the death of their parents, spouse or children. In this grand feast Brahmins, Dogs, Crows and the poor are served with delicious food. Brahmins and poor are also given cloths, cash and other gifts.

I am not competent enough to comment about the traditions of other religions and cultures, but I am sure similar traditions are practiced by the followers of other religions also.

The anecdotal evidence that I have collected from my interactions with numerous villagers and urban poor, this feast (श्राद्ध) could be one of the top 10 reasons behind perpetual indebtedness, bonded labor and socio-economic distress of numerous rural Indian household.

Regardless of the religious significance and/or relevance of these rituals, I find it pertinent to to highlight that "the feast" will be held regardless of you. In case you want to enjoy the feast, you need to survive till good times arrive; otherwise it will be for the Brahmins, poor, cows and crows to enjoy the feast.

Relating this analogy to the economics, markets and politics—

In past two decades corporate India has invested huge amount of money in creating capacities. Many of these capacities, especially in infrastructure and real estate sector, have been created without bothering about the prevailing demand conditions. Consequently, a significant amount of these capacities became economically unviable. Promoters who created these capacities, bank managers who funded these capacities, and investors who provided equity to these promoters and lenders - are all in distress.

There is no argument against the need for these capacities. The demand will also come in next few years. But the question is who will enjoy the feast. The bank managers would have retired, sacked or shunted out for his poor performance. The promoters would have diluted his equity substantially at distress price or forced out by IBC. The equity investors would have booked the loss.

The Brahmins and Crows - the new bank manager in whose tenure these capacities will become viable adding to bank's profitability, investors who will buy equity at distressed prices and acquirers who would then be managing the show - will feast on the misery of others.

The traders in stock markets usually have this tendency to protract recognizing their losses. These losses could be due to wrong choice of stock, sudden change in external environment, or any other reason. But the first reflex of most traders is to average the cost by buying into the fall in prices. More often than not the traders end up losing more money than they would have lost had they booked the loss at first hint of trouble. The pain of loss rises exponentially when they see the whole market recovering, except the stocks they own.
It must be understood that to benefit from whatever good a government does, the political parties running that government will benefit from that good only if they survive to see the result of their good deeds. Otherwise, the party that will form the successive government will enjoy the benefit.

The moral of the story is simple - You must survive to enjoy the fruits of you labor!

Friday, September 6, 2019

Debating the slowdown - 3

Continuing from yesterday (see here)

To understand whether the current economic slowdown is structural or cyclical; and whether the problem stems from the demand side of the supply side, I must understand the meaning of this jargon. Not being an economist, I would like to define this jargon from my own prism to suit my layman understanding.

Structural economic slowdown, in my view, means that current economic activity is the best that can be achieved within the current social, legislative, political and economic context. To achieve higher growth that the present level, material improvements (know as structural reforms in common parlance) would be needed in all these spheres at policy, administration and execution levels.

Cyclical economic slowdown on the hand means a temporary disequilibrium between the forces of demand and supply resulting in demand destruction.

A disproportionate change in demand usually occurs due to excess liquidity, change in rates, changes in fiscal incentives, fear of unusual supply changes in near future, etc. Such change in demand that is not matched by proportionate change in supply invariably leads to changes in prices and eliminates the demand from the marginal buyers or marginal producers.

Similarly, a disproportionate change in the supply may occur due to excessive capacity building in anticipation of future demand; disruptions in supply caused by natural events, legislative changes, geo-political conditions or civil unrest etc.

The cyclical slowdown is reversed as the forces of demand and supply return to the state of equilibrium through policy intervention and/or rebalancing of market forces. Usually no material policy changes are needed to manage the cyclical slowdown.

In my view, the slowdown witnessed in Indian economy is structural and would need material improvements in social, political, legislative and economic context of the country.

Damage to economic structure

In my view, the seeds of this slowdown were sown during the NDA regime led by Atal Bihari Vajpayee (1998-2004). The tenure started with the big blast (May 1998 nuclear test) and was punctuated by major initiatives like NELP (hydrocarbon exploration), SEZ (key reforms in land, labor and tax laws in select zones), NHDP (highways), PMGSY (rural roads), AAY (food security for poor), SGRY (employment for rural poor), SSA (primary education for all), airports privatization, port privatization, Electricity Act 2003, spread of mobile telephoney, 100% FDI in core sectors, etc.

These initiatives excited the global investors at a time when Indian IT professionals were making big impression on global technology canvass. A supportive regime, Y2K problem, easy credit post LTCM and Asian crisis (rates lowest since 1970s) and depressed commodity prices (inflation lowest in decades) helped big investment initiatives.

The problem was that many of these programs were initiated hurriedly without putting an adequate institutional mechanism in place, thus leaving the scope for misuse (of discretionary powers by minister and bureaucrats), litigation (ownership of natural resources), misappropriation (of natural resources by scrupulous allottees), non-compliance (environment and sustainability norms) and wide viability gaps (absence of immediate demand) and thus planting the seeds of financial stress, economic slowdown, mistrust and corruption. Subsequent UPA government watered and nourished these seeds well.

The advanced demand for infrastructure (as distinguished from "need" for infrastructure) impacted sustainability of many large businesses and eventually resulted in near collapse of PSBs and widespread collateral damage to the entire supply chain.

In particular, the road and power sectors are still reeling under the stress.

Damage to the social structure

It is clear that our society has defied the classic Maslow's evolutionary pyramid. It is moving directly from sustenance to aspirational consumption. The demand thus created is neither desirable nor sustainable.

I see that in rural and semi-urban areas, motor cycle has replaced bicycle as a mandatory dowry item. These days, it is almost impossible to marry your daughter if you cannot afford a motorcycle and smart phone in dowry. Many old aged villagers argue that it is a collateral damage of better road and telecommunication connectivity. The road and information highways have taken the markets to people in remotest of the areas, but little efforts have been invested in enhancing the skill and awareness level of the people. Employability and earning potential has not improved commensurate with the aspirations. The social structure is thus damaged.

Secondly, the youngest demography in the world is like a vast reservoir of unexploited energy. If not channelized properly, it can destroy the very core of our social fabric. The rising number of poorly educated, inadequately skilled underemployed, unemployed and employed in disguise youth is no strength for the economy. It is indeed a serious weakness.

On one hand, India is failing in her duties towards the international community (see here); on the other hand we seems to be fast running out of ideas for managing this vast and invaluable resource for our economic good. Rise in petty crimes, instances of civil unrest, deterioration in general compliance standards are just few prominent consequences.

People are spending on motor bikes, smart phones, SUVs, tractors, wedding & birthday celebrations, compromising on food, health, education & training, and shelter needs.

This is raising three damaging trends in the socio-economic milieu of the country:

(a) Even the people who are better off in absolute monetary terms frustrated and cynical than ever.

(b) There is an increasing tendency to depend on the State for meeting basic needs.

(c) The consequent financial stress is gnawing into traditional Indian ethos, where defaulting on debt is considered one of the greatest sin. These days it is not uncommon to see people not only willfully defaulting on loans but also encouraging others to do so.

Distortions created by political structure

The pseudo socialist and quasi feudal nature of our democracy often leads to wasteful expenditure. The policies and plans focused on winning an elections rather than achieving sustainable economic growth and development result in serious misallocation of capital and sub-optimal of resources.

We have seen politicians creating undue and totally unsustainable demand for color televisions, smart phones, laptop computers etc. by manipulating the process of democracy.

We need a political organization that fully assimilates the aspirations of the people, addresses specific local problems, promotes mutual trust & harmony, bars incompetence and knavery from public office, and insures that the best is selected and prepared to rule for the common good.

The legislative problem

Since 1976, our governments have been constitutionally mandated to be "Socialist". Any legislation or policy of the government must pass the test of socialism before being implemented. This constitutional commitment often conflicts with the ideas of free markets, global competition, liberalization, etc. To avoid this conflict the governments mostly try to include a multitude of safeguards any policy framework that is intended to promote free markets and competitive enterprise.

Consequently, we find most of our economic legislations complex and ambivalent, adding the element of unpredictability to the economic decisions. Frequent revisions, roll back and totally avoidable litigations is the outcome of this conflict.

We would need to address all these problems before our economy can move to a higher orbit of growth.

I would like to share my thoughts on material improvements (reforms) that may be considered to make structural corrections to the economy next week.

Thursday, September 5, 2019

Debating the slow down - 2

Continuing the debate on growth slowdown from yesterday (see here), I would argue that the economic growth trends in an economy like India (which is large, diverse and runs a multiparty democratic system) would usually take a longer time to establish. It would be unreasonable to attribute the slow down or acceleration in growth completely to any plan, strategy, measure (legislative or administrative) etc that has been implemented in recent times.

Construction of core infrastructure like power plants, highways, ports, coal mines, etc usually entails a long gestation period that in many extends to more than 5yrs (full term of a government). The full impact of these projects on growth is therefore felt only after these are completed and commissioned. The current acceleration in growth therefore is mostly result of the efforts made in past many years. Similarly, a significant change in the economy like (i) opening more sectors to global competition; (ii) withdrawal of subsidies; (iii) GST etc would usually have immediate adverse impact on the weaker/smaller businesses, employment, asset quality of lenders, consumption, savings, growth rate etc. However, the positive results of these measures would be felt only after some years.

Therefore, in my view attributing acceleration or deceleration in short term growth to the incumbent government is inappropriate, notwithstanding the political rhetoric.

I have said it many times before, and would like to reiterate that the economic policy direction of all government in past 35yrs has remained mostly the same. All governments have pursued the same agenda of liberalization, globalization, inclusion and social equity. For example consider the following:

1. The process of meaningful tax reforms was started by the then finance minister V. P. Singh (Congress 1984-89) by rationalizing the tax slabs, lowering maximum marginal tax rates substantially, rationalizing wealth tax and introducing CENVAT. The recommendations of Raja J. Chelliah Committee (1991-93) on tax reforms constituted by the government (Congress 1991-96) have since formed the basis of tax reforms in India. All successive governments have implemented these recommendations. No government has sought to reverse or alter the process started by Congress government (1984-89). These recommendations formed the core of all the versions of Direct Tax Code. The origin of the tax proposal like lower tax rate with lesser exemptions and no wealth tax proposed in could also be traced to that.

Committees formed under the chairmanship of other members of Raja Chelliah committee like Govinda Rao, Partha Shome and Vijay kelkar etc. subsequently updated the recommendations to provide further impetus to the entire process of tax reforms in the country.

It was the Finance Minister of H. D. Devegoda led United Front government who presented the most talked about "dream budget".

2. The recommendations of Narsimham Committee (1991-92) appointed by Dr. Manmohan Singh, the then finance minister in the Congress government, have largely formed the basis of financial and banking sector reforms in the country. Most successive governments have implemented the recommendations consistently. In fact, P. Chidambram, the then finance minister in United Front government (1998) had re-appointed the Narsimham Committee to make recommendations about the second generation banking sector reforms. The report was submitted in 1999 to the NDA government which accepted the recommendations.

3. In 1991-92, the then government moved decisively to end the distinct socialist bias in the economic policy, that constricted India's economic development and integration of India's economy with the global economy.

Economy and markets were opened for foreign investors. Forex regime was liberalized under LERMS. MRTP restrictions were materially eased. Under new industrial policy a large number of industries and sectors were freed from licensing requirements. Capital controls were substantially eased, and office of capital controller (CCI) was abolished. Capital markets were liberalized. SEBI and NSE were established. The role of public sector was redefined and the process of disinvesting government stake in PSEs initiated. Civil aviation and telecom sectors were opened to private sector. New age private banks were allowed to operate as full service operators. Election process was dramatically improved and enhanced. WTO membership in 1995 also changed a lot of things for India.

Then during 1998-2004, another Reset was effected the government, taking the process started in 1991-92 to a much higher orbit.

The government gave up most of its monopolies. Private sector participation, in core sectors like coal, power, roads & highways, oil & gas, insurance, etc. was allowed. Digital connectivity was provided a massive thrust through New Telecom Policy, along with road and rail connectivity. PM rural road program (PMGSY) has been one of the best government programs in independent India. National connectivity projects like development of Golden Quadrilateral under PPP model, Delhi Metro Rail Project (that became a role model for many mass rapid transport systems (MRTS) in India and abroad, were initiated. The process of disinvestment in PSEs was enhanced substantially. Sarva Siksha Abhiyan was a massive effort (and successful) to bring children to school.

4. The BJP led NDA government enacted the Fiscal Responsibility and Budget Management Act (FRBMA) in 2003. The arch rival Congress led UPA-I government implemented the same in 2004 in letter and spirit. This still forms the very basic of fiscal discipline both at central and state levels, though implementation was suspended in 2009 in the wake of global crisis and need for stimulus. In FY13 stimulus withdrawal commenced and all subsequent Finance Ministers have committed to achieve the targets without fail.

5. The minority government of Chandrashekhar introduced disinvestment policy first time in 1991. Every successive government since then has not only accepted the policy in principle but also tried to actively integrate it into the evolving economic model. Almost all of them have consistently failed in implementing the policy in right spirit.

6. The idea of single national market (GST) was mooted by the UPA-1 government as a natural progression from VAT regime implemented during NDA-1 regime. The NDA-2 government implemented the idea.

The point is that the Reset of 1990s did not result in growth acceleration till FY2004. The reform measures in fact resulted in material growth deceleration as there was huge rise in Bank NPAs; two major DFIs (ICICI and IDBI) were eliminated, the third one (IFCI) was decimated; the largest DII UTI was eliminated; all private airlines faced closer or sell out; many new age banks had to be merged with larger peers; thousands of unviable steel and cement plants had to b shut down; many textile mills went out of business; unemployment rose to new heights and BoP worsened.

The eventual outcome was a strong new economy which is - globally competitive in areas like ITeS, Automobile, Pharmaceutical, etc.; interconnected through a wide network of highways; sufficient in power production capacity to fuel growth; a recognized nuclear & space power commanding respect from all significant global players; an attractive market for global automobile and appliance manufacturers; a preferred investment destination amongst emerging market peers.

The period from 2004-2010 witnessed significant rise in long term growth trend, before the global financial crisis changed many things and warranted another reset. That reset began from 2013 and still continues. This period has seen significant deceleration in growth. The existence of many businesses is threatened. The unemployment is high and rising. The financial stress has remain elevated.

But the expected outcome would be a transparent, strong and much less riskier financial system; globally accepted business and accounting practices; stronger, larger and scalable businesses; higher number of organized sector employment opportunities; improved infrastructure; strong and widely acceptable business failure framework.

Insofar as the long term growth trend is concerned, as evident from the below chart, the deceleration started from FY08 and continues. In my view, it will bottom in next two years at much higher level than FY03 level. The acceleration from FY22 onward may also surpass the FY08 peaks; and the uptrend shall last much longer than the previous 5yr (FY04 to FY08) period.

The key risk is failure of the government in securing the confidence of people, especially the youth. A widespread civil unrest against the establishment (not likely in my view) may invalidate my hypothesis completely.

To continue tomorrow.