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Why Structural Reforms Will Again Be Given A Miss? The Need vs. Action From Budget 2018

In the night before the Budget 2018 gets presented, let us discuss a few aspects that we believe are of utmost importance for growth of Indian economy. The slowdown in GDP growth has been well discussed. It has come down from 8% to 6.5% in 2 years. While that itself is a matter of concern, it must be noted that the GDP is a very broad parameter, averaged to such an extent that more acute aspects of growth gets glossed over. Let us highlight a few structural areas of concern that may prove detrimental for overall growth of the country:

  1. Food for all: (For details, click here)
    1. 25%: India’s contribution to global hungry people count of 800 million. India score on Global Hunger Index is at 31.4 (just above Pakistan)
    2. 9.6%: %age of infants who receives an adequate diet (age between 6-23 months) is
  2. Financial Security: (For details, click here)
    1. 5%: Only 5% of an Indian household savings is in financial asset
    2. >50%: %age of unsecured debt in total liabilities. Does this explain the increasing case of farmer suicides at-least partially?
  3. Health for all: (For details, click here)
    1. 21%: India’ contribution to the disease burden of the world population (WHO 2013) while contribution to total population is 17%. The greatest burden is with maternal, new born & child
    2. Lowest Rank: Among BRICS countries, India ranks lowest in under-5 mortality rate and children <5 who are stunted (severe/ moderate)
  4. Education for all: (For details, click here)
    1. 60-70%: There are still multiple states where literacy rates are still so low

Obviously, it does not require mention that food, financial security and health are very closely interlinked and intertwined with each other. The failures till date on the above reflects both skewed policies and bad execution.

While the above challenge is an outcome of failure across years, there are several new additional concerns that is reflected in the higher stress in the economy:

  1. Significant drop in Consumer Sentiments: (For details, click here)
    1. The RBI Current Situation Index has dropped from high of 105 in Sep-2014 to 95.5 in Sep—017 with a negative outlook on general economic condition (-6.2). The primary driver for this has been demonetization coupled with lack of employment generation (perception on employment had net score of -13.6 in Sep-2017)
  2. Lackluster performance of Industry:
    1. GVA growth for Industry as sector, is estimated to be in range of 2.9% (2017-18), compared to 11.7% in 2014-15. Subdued economic sentiment has surely impacted the sentiment of the corporate sector who have been mostly sighing from making major investments
  3. Lack of credit available in the system: (For details, click here)
    1. The formal credit institutions and primarily the PSU banks are under severe stress due to high NPA in corporate sector. This has not only reduced available credit and made the banks more cautious
  4. Threat to national security:
    1. The threat of insurgency notwithstanding, the growing flexing of muscle by China and the Dokhlam incident has brought in focus on the need to strengthen the defense portfolio which also would mean greater allocation of fund towards defense

The challenge that lies ahead that a government is looking at fiscal deficit 3-3.5% of GDP. April-October data of fiscal deficit was reported at 5.25 Trillion INR, equal to 96.1% of budget estimate. Despite the expected divestments lined up and additional direct tax revenue expected from GST, the fiscal deficit is not going to go away and hence the government will have to make a choice where it allocates its funds.

Question is what are the options for the Government?

  1. Think long, increase allocation to the four key structural areas we highlighted initially. Pros: Improves the livelihood and the fundamental economic condition of the country (better health, better education, better livelihood are key long-term fundamentals that can transform the economy). Cons: Impact will come with significant lag and hence no perceptible changes can be seen in short term. 201718 economic survey righty notes Healthy and educated individuals, with the ability to adapt and learn on an ongoing basis, need to be the core of the future labor force
  2. Think 2019, dole out more, increase government expenditure. Populist budget (marginal reduction in tax brackets, sops for central government employees, tax reliefs for corporates etc.). Pros: Boost consumer confidence, increase spend, improve economic sentiment and spurt some growth in the economy. Cons: Will not address the key structural challenges of our economy and hence no perceptible change to be expected on overall economic fundamentals

Probably, the Government will take a middle path, leaning more towards the 2nd option. In 201617 Economic Survey, one of the key objective that was mentioned “Wiping every tear from every eye”! This will remain a pipe dream and unfortunately, we are seeing more disparity in wealth distribution. 201718 economic survey rightly notes “…the need to redistribute to check growing inequality and cushion against the impact of globalization

To summarize, we are very pessimistic of a real transformation to be driven by the 2018 budget and hence not much change on key structural parameters for the economy. Uncertainty of the economy is expected to continue despite that probably we may see a rising Sensex to a populist budget tomorrow. Sensex, by the way is a poor metric to measure economic development of the country!

 

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Image: mapsofindia.com

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