In a major political sensation that has stunned world leaders, Narendra Modi has steered BJP and its NDA allies to a clear majority in the recently concluded general elections in the world’s largest democracy.
Now, with Modi assuming stewardship of the country, as Prime Minister, there is widespread expectation of “Acchhe Din Aayenge” (Good days will come). Backed by his absolute majority in the Lok Sabha and an apparent freehand in ministry formation and policy formulation, Narendra Modi has got the wherewithal to make good days happen again for the country and its billion-plus citizens, given his characteristic firm and corporate-like handling of administration.
In this connection, we list some major areas that require his immediate attention in order to reverse the current downbeat sentiment permeating India Inc. and the common man and put the economy back on a growth trajectory.
With two years of sub-5 per cent average growth, a consistent decline that has not happened for over two decades, there is an urgent need to break through this noose. In this context, a weakening manufacturing and mining needs immediate remedial measures. Manufacturing, which had been driving the economy until recently, has declined for the first time in over three decades due to demand slack and blocks on supply side. Mining, which provides minerals to manufacturing sector and fuel to power sector, has also turned listless. The capital goods production index, a surrogate for project investment, has declined for the third consecutive year, a dubious first that has not happened in more than two decades. This would also speed up trade and commerce which are also slackening due to feeble production machinery. Agriculture, a state subject, needs reforms particularly in marketing, which would ensure adequate returns to farmers.
With two years of the 12th Five-Year Plan, which has targeted over $1 trillion investment in physical infrastructure, ending with the decade’s worst performance, the near-term outlook is not reassuring.
At macro level, the investment intensity of the economy has got badly hit; the investment rate, as measured by the ratio of GFCF to GDPmp, sank below 30 per cent to around 28 per cent, from 30 per cent in fiscal 2013 and 31 per cent two years ago. Capital goods production has declined and so has machinery import, though engineering goods export has increased in view of inadequate absorption potential in the domestic investment market.
In one more indication of deficient project investment in India, the capital outlay index as measured by the ERIL Index of Cost of Project Inputs rose only 2 per cent over the fiscal, dwindling from 2.4 per cent during 2012-13 and a healthy 6.4 per cent two years back.
At the current juncture, the major problem facing the nation, as underlined in the 54th Survey of ProjectsToday on over 49,000 ongoing projects, is the dwindling pace in growth of projects on one hand and falling share of projects under active execution on the other i.e. eroding the implementation ratio, which implies that projects take more time to progress from planning stage to active execution.
Adding complexity to this problem, fewer new projects are launched and a lesser number of projects end the construction cycle which with lengthier execution periods vitiates the viability of projects.
Thus, apart from adequate additions to stock of projects, urgent steps are called for to speed up project execution that would shorten gestation period and help in improving financial, economic and social returns.
Recapitalising public sector banks
Substandard loans, reflected in known non-performing advances adjusted for restructured corporate loans, are shooting up, thus progressing deeper into double-digit level share in gross bank advances. This has vitiated badly the quality of bank advances and, indeed, bank earnings. This calls for determined action on recovery of bad loans particularly from willful defaulters. In the meantime, public sector banks, which are more affected by substandard assets portfolio and have substantial global exposure, need urgent recapitalisation to meet Basle guidelines on capital adequacy.
There is consensus on improving fiscal consolidation and reducing fiscal deficit needing stricter control and better targeting in subsidies, which are assuming an increasing share of government disbursements. However, quality of fiscal consolidation is important, but economic interests should not be undermined while endeavouring to bring down deficit. Though consolidation targets were met, fiscal deficit reduction in last two fiscals was not in the best interests of the economy. This was because it was achieved through cut-downs in plan account disbursements, selling PSU equity at suboptimal prices, and forcing PSUs to cough up more dividends to shore up fiscal receipt, which was not congenial for a slowing economy and subdued investment outlays.
Controlling food inflation
Even as WPI-based inflation has tended to slow down in the first four months of calendar year 2014, the price rise in food articles at 8.64 per cent is much higher than 5.20 per cent for all commodities in April. This is amply reflected in 8.59 per cent inflation based on broader CPI numbers released by the Ministry of Statistics and Programme Implementation. Food inflation hurts the common man the worst. In CPI-based inflation, price rise for vegetables and fruits was running twice the aggregate measure. This would call for augmenting supplies on one hand and overhauling distribution system in the immediate term to bring some orderliness in retail prices on the other.
Reduction in CAD
In the external sector, while in the current scenario, reduction in current account deficit could only indicate truncated demands in the world markets from a slowing economy, a sustainable CAD policy would call for export-boost and meeting import demands of domestic growth on one hand and a sound, well-balanced policy on capital import on the other to bridge the deficit. Here, a sensible exchange policy is also needed to insulate the economy from fickle short-term global capital flows.
Invigorating the administration
The above agenda would need a flurry of action in terms of policy issues, effective reforms, clearances and governance. The government administration would have to be overhauled from fear-psychosis and policy-paralysis status to a vibrant one, at the same time taking care to see that scope for policy confusion and the resultant likely corruption is reduced.