Vijay Kumar Gaba

Last month the incumbent NDA government completed nine years in power with BJP having full majority in the Lok Sabha on its own. In the 2014 general election, it was after three decades (post the landslide win of the Congress party led by Rajiv Gandhi in 1984) that a single party (BJP) had secured over half the seats in the Lok Sabha. Obviously, the people had great hopes from the new government that has won their confidence on the promises of a corruption free regime with equal opportunities (Sabka Saath Sabka Vikas).

For the 5years (2014-2019) the Indian economy (Real GDP) grew at a CAGR of ~7.4%, slightly better than the CAGR of ~7.1% during the previous five-year term (2009-2014). In 2019, the BJP returned to power with an even larger majority. During the first four years of the current term, the Indian economy has grown at a CAGR of 3.1%, the slowest pace of growth achieved by any government in the post liberalization (1991) era.

The best growth trajectory was seen during UPA-1 tenure when the economy managed to grow at a CAGR of 8.52% (2004-09). This was perhaps the outcome of massive reforms implemented by the preceding NDA-1 government (1998-2004); in which monopolies of the government over the core sectors like power, mobile telecom, coal, roads, oil & gas, airports, ports, etc. were divested. NDA-1 also implemented massive investment-oriented policy initiatives like SEZ, NHDP, PMGSY, Missile & GPS development, UMPP, NELP, etc. that led to accelerated investment and growth in the following decade.

The UPA government (2004-2014) earnestly took forward the reforms initiated by the NDA-1. It substantially liberalized the FDI regime; signed the Civil Nuclear Deal to usher a new era of strategic partnership with NATO & NSG; and introduced the first universal basic income scheme in the form of MNREGA and food security scheme in the form of National Food Security Act 2013.

Most important, it laid the foundation of complete digitization of the Indian economy in the ensuing decades by creating robust platforms like UIDAI (Aadhar) and NPCI (UPI, Fastag etc.); and laying an aggressive roadmap for financial inclusion in the budget speech of FY11 in accordance with the recommendation of the Rangarajan committee (2008).

The financial inclusion roadmap required banks to reach 73,000 rural habitations with a population of over 2000 by March 2012, using information and communication technology-based models and banking intermediaries (Business Correspondents). RuPay – an Indian domestic debit card, introduced on 26 March 2012 by the NPCI was a key landmark in this journey. Basic Savings Bank Deposit Account (BSBDA) along with BC proved extremely successful in increasing the total number of banking touch points from ~67k in FY10 to 586k in FY16 (RBI Annual Report FY17). (BSBDA was rechristened as Jan Dhan Yojna- PMJDY with enhancement of scope to include some other financial services within its ambit.)

The UPA government also introduced The Constitution (115th Amendment) Bill, 2011 to implement a common nationwide GST based on Ajit Kelkar committee (year 2000) recommendations; though the bill could not be passed due to opposition from other parties. The UPA government also introduced The Real Estate Regulatory Authority (RERA) Bill in August 2013. The bill was referred to the standing committee of the parliament, which submitted its report after considering public comments in February 2014. The Bill therefore could not be passed during UPA-2 tenure.

It could be argued that sub-optimal performance of the economy in the past four years is primarily due to the impact of Covid-19 pandemic that shutdown the economy for almost 6 months in 2020. In my view, however, the argument could be accepted only as partially valid. Most previous regimes had also witnessed massive disruptions and displacements like the financial sector crisis (failure of UTI, ICICI, IDBI, ICICI etc.); Asian currency crisis (1997), global economic sanctions post 1998 nuclear tests; dotcom burst; global financial crisis (2008-2010); energy inflation due to wars in the Middle East Asia; banking crisis due to collapse of infrastructure sector that was used to stimulate the economy since 1998 with numerous unsustainable projects; political instability (three election in three years 1996-1998); Kargil War; incoherent political alliances (especially UF, NDA-1, UPA-1) etc. Despite all this, most governments could achieve a higher growth rate than what we have seen in 2019-2023.

It is evident from the pace of highway construction, digitization of the economy, financial inclusion, and extension of universal basic income schemes, etc., that the incumbent government has pursued the programs and policies initiated by the previous governments and continued to build upon the platforms created by his predecessors. Schemes like PLI have also set ambitious targets; even though the results so far have not been encouraging.

However, we have not seen any transformative policy initiative that can lend the necessary velocity to the economy to catapult it into a higher orbit. There is little progress in the areas of agriculture reforms, disinvestment etc. Fiscal sustainability has remained compromised, as the debt burden has continued to increase. The private capex has mostly remained evasive due poor demand conditions and risk averseness of banks. Though the situation has shown marked improvement in the past 15-18months. The price situation has remained volatile, mostly governed by external factors like global prices of commodities and weather conditions. There is little evidence to show that the government and/or RBI have any plan in place to control the volatility in prices.

In my view, however, the worst aspect of the current regime has been the failure to ensure adequate employment, especially in the manufacturing sector. More on this tomorrow.

 Being the finance minister of India is arguably one of the most challenging jobs in the world. The incumbent has to deal with 28 Federal States and 8 Union territories, each having a distinct socio-economic and fiscal profile. Unlike some developed countries like the USA, the Federal States in India are not autonomous and/or self-reliant in fiscal matters. These states rely on the Union Government for financial resources. Besides, the finance minister of India is limited by the constitutional mandate of being “socialist”. To make things more complicated, implementation of GST; acceptance of the recommendations of 15^th Finance Commission; and abolition of the planning commission have materially curtailed the powers of the union finance minister.

Technically speaking, all the policies formulated and proposed to be implemented by the union finance ministry must pass the test of “socialism”, since the Constitution of India overrides all the legal provisions and policy directives. This makes it very hard for the finance minister to pursue the goal of faster growth through promoting capital investments in the private sector that are likely to eventually result in more socio-economic inequalities.

Even when the finance minister tries to extend fiscal and other support to large businesses to stimulate economic growth, these efforts are invariably met with strong opposition from the politicians belonging to the ruling party & opposition; civil society and common people.

To mitigate the political damage that may be caused by such criticism, the finance ministers have often supported the larger public sector; contrary to the stated policy of minimizing the role of the government in business. Also, the finance ministers in India have often taken the path of ‘crony socialism”.

They often pursue fiscal policies targeted to benefit a specific set of voters and/or specific regions; inviting criticism from the businesses and capital market participants. The finance minister is often criticized for inaction in terms of economic policy and reforms; fiscal imprudence in pursuing profligate social policies and programs; incoherent foreign policy; failure of monetary policy in controlling consumer prices; impeding critical infrastructure projects; incongruent taxation policies; and corruption in financial institutions etc.

The socio-economic condition (especially the fast waning demographic dividend) of the country warrants that the governments vigorously pursue the course of faster and sustainable growth over the next couple of decades. However, the pursuit of this goal would inevitably result in widening and deepening inequalities of income and wealth.

The experience of western developed economies indicates that faster growth ultimately results in 10:90 division of the society – 10% people owning most of the wealth and accounting for most of the savings; while the rest 90% just survive. Of course, the standard of life for the underprivileged 90% in developed countries is much better than the corresponding 90% population in India.

 Notwithstanding the buoyancy in stock market, the economy has shown some clear signs of fatigues in February. The post lock down recovery from September onwards appears to be pausing, as pent up consumer demand has subsided and rise in raw material prices has dampened the sentiments. Some signs of economy pausing could be read from the following:

(a)   GST payments in February (for collections in January) have declined after rising for three consecutive months.

(b)   E-Way collection in February were also much below the December levels.

(c)    Exports have been mostly flat for the month of January and February; while imports have declined from the December levels.

(d)   Non food credit growth slowed down further in January.

·         The Industrial credit contracted -1.3% in January. The contraction was led by large industrial credit, which constitutes ~82% of industrial credit and de-grew 2.6% YoY. Within industrial credit, sectors such as infrastructure (led by telecom), metals and all engineering saw persistent YoY de-growth.

·         Service sector credit growth slowed to 8.4% (yoy) in January against 9.5%

·         Personal loan growth slowed down to 9.1% (yoy), the slowest rate in 10year. Home loan growth 7.7% was lowest in a decade despite easing rates.

·         MSME credit grew at meagre 0.9% (yoy), despite all the incentives, programs and schemes for promoting and protecting the credit flow to MSME sector.

(e)    In January the eight core sectors’ output growth slowed down to 0.1% (yoy) from 0.2% (yoyo) in December.

·         Cement production fell by ~5.9% YoY in January 2021 according to the core industries data released by the Government of India. The YTD demand continues to be weak with the fall of ~16.6% as indicated by the data.

·         As per a recent report of Nomura Securities, “Indian steel demand dropped 6% m-m for Feb-21 (though 7% y-y) as buying interest from large construction majors turned sluggish on high prices. Key infra names have slowed down execution. Further, major stockists and distributors are holding decent inventories and seem reluctant to procure material at higher prices. Demand growth y-y has been boosted by double digit demand growth in key segments like autos, white goods and consumer durables, according to Steelmint.”

(f)    As per another recent report by Nomura securities, “The Nomura India Business Resumption Index (NIBRI) fell to 95.2 for the week ending 7 March vs 98.1 in the prior week, indicating that the gap from the pre-pandemic normal has slipped to 4.8pp from only 0.7pp a fortnight earlier. Both the Apple driving index and the Google retail & recreation indices have taken a hit, while workplace mobility continued to improve. Power demand fell by - 8.5% w-o-w (sa) vs 4.2% in the prior week, while the labour participation rate also fell to 39.8% from 40.6% previously.”

 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.

Some of the readers have found my yesterday’s post (The best place to watch this Opera), unnecessarily alarming and extremely hypothetical. I respect their opinion, though I may not necessarily agree with their comments.

I had faced similar kind of criticism, when I found that a symmetrical fall in the market due to outbreak of pandemic may be unwarranted. I expected that the impact of COVID-19 lockdown over various sectors and businesses may be asymmetric and therefore the precipitous fall in the entire market is a big opportunity to buy the businesses that are likely to be less affected or positively impacted. (Time to Take Big Call) My decision to go tactically overweight on equity did not go well with many readers at that time; though I have no regrets. Moreover, I corrected my tactical equity overweight stance in late August (Preparing for chaos – 4). Presently, I am maintaining my standard asset allocation of 60% Equity; 30% Debt and 10% Cash; and as stated in yesterday’s post I intend to go tactically underweight on my equity allocation and increase cash in the coming months so that I could watch the situation unfold without any lines of worries on forehead and adequate dry powder in my pocket.

Now, coming back to the criticism of me being unnecessarily alarming and extremely hypothetical; I would admit that there may be some points of view from where I may look alarmist or hypothetical. But at the same time there are many other points of view that may show different aspects.

To give an analogy, I see the present situation as one with the battle with a strong enemy. While the battle is continuing and armies from both the sides are deeply engaged; it is essential that pain, wounds, blood, destruction and death are completely overlooked. Bothering about these things may make the soldiers emotionally challenged and weaken their will to fight the enemy.

However, when the battle ends, regardless of the victory or defeat, both the sides will have to face the consequences. The wounds would take time to heal. The soldiers will have to adjust themselves to work without the organs that got amputated. The assets that got destroyed in shelling will have to be reconstructed. Each coffin returning from the battlefield will have to be accounted for and dead would need to be buried. This process is usually excruciatingly painful, prolonged and emotionally devastating.

Presently, we all are fighting a battle with SARS-CoV-2, popularly known as COVID-19 or Corona Virus. In past seven and a half month, the economy has suffered a lot. Remember, Indian economy went into the battle with SARS-CoV-2 with a weaker immune system.

The sub-par growth for past many years had already weakened the economy. The government and RBI had already used a lot of ammunition to fight the economic slowdown. The financial system was struggling with the highly debilitating NPA disease. Numerous small and midsized businesses were already on the verge of collapsing. The corporate earnings growth had been anemic for past one decade. The external trade was not growing due to (i) poor global demand and (ii) intensifying competition from small countries like Bangladesh, Vietnam etc. The employment generation was materially inadequate, when seen in comparison to the accelerated addition to the workforce every year.

The pandemic has materially increased the distress at household as well as business level. The resources of the government are also severely constrained. There is some monetary ammunition left with RBI, but it is not certain whether RBI will be able to save it till the end of the battle with the enemy. Once the battle nears end (vaccine is developed and it begins to reach people), the States may begin to withdraw the relaxations. The coffins will begin to reach home by next summer and will have to be accounted by the financial investors only, as is the case always. I see this scenario from where I am standing. If someone is standing at a different vista point and able to see greener pastures, I envy them and sincerely wish good luck.