The NDA's first full budget to be unveiled this weekend is being described as "make or break" by the corporate world, especially the stock market community, which is getting rather impatient about "little or no action" in the economy. To rub salt in their wounds, the government statisticians have estimated a robust 7.4 percent GDP growth in 2014-15 even though no economic indicators show any substantive recovery.
If anything, Oct-Dec quarter had produced the worst corporate results in about 8 years, a negative earnings growth for the top 100 companies by market capitalisation. The mood in the corporate world is quite sombre and no one wants to really celebrate the statistical "Achhe Din" pulled off by the CSO. Both the RBI Governor and the Chief Economic Advisor in the finance ministry reacted to the statistical upgrade with sheer puzzlement.
For it didn't quite square with the sharply declining exports, decelerating manufacturing demand and slowing bank credit. The mood is far worse than it was some six months ago. The ubiquitous voice of Indian industry,Deepak Parekh, last week said he was still waiting to see decisions translate into reality. Well respected global investors like Jim Rogers and others of his ilk also echo this sentiment.
The problem for the PM and FM is even as they are trying hard to please the investing community with promises of an easy business environment and friendly tax regime, large sections of small farmers are looking at this budget as "make or break" from a perspective very different from that of the business community. Farmers are suffering the worst loss of pricing power in a long time as global agri commodities correct by upto 30 percent.
They are invoking Modi's explicit election promise of higher support prices for a range of farm produce. Modi is caught between competing constituencies. The mid-year economic survey welcomed the fall in agri commodity prices globally as it lowers food inflation and makes it possible for RBI to drop interest rates for businesses. But farmers look at the same thing from the other end of the telescope. The politics around this complex question is quite unpredictable. Economists in Niti Ayog can't give a solution to this. This is Modi's big dilemma, especially after the loss in Delhi.
Prabhakar Kelkar, the head of the Sangh Parivar's farmers union, Bhartiya Kisan Sangh, bluntly told this writer, "I acknowledge this is a government for which the Sangh Parivar worked. But we are disappointed that Modi has just forgotten all the promises made to the farmers during the elections. The antipathy to farmers has forced me to publicly state my disappointment in Bhopal where we had a farmers' rally recently".
Kelkar says 92 percent of India's farmers work on small farm holdings of less than 5 acres and their income from farm range from Rs 2500 to Rs 6000 a month. This is a particularly bad year for farmers as global food prices have collapsed. I see farmers committing more suicides in the months to come. Kelkar is also openly opposing NDA's land ordinance. So Prime Minister Narendra Modi and finance minister Arun Jaitley will have to perform the impossible task of reconciling the "make or break" cries coming from different constituencies vying for their attention.
In short, this is the dilemma Jaitley will face in the coming months as agriculture growth is slipping badly and this will have a serious impact on industrial demand. Companies are showing negative growth for the offtake of two wheelers and many other items sold predominantly in rural India. Are we slipping into a vicious cycle of slowing farm incomes and falling industrial demand? This needs careful analysis.
Jaitley will have to address the demand problem, first and foremost. Industry is working at 65 percent capacity. Normally businesses wait for capacity utilisation to reach 85 percent to 90 percent before considering expansion. So any amount of fresh incentives will not kickstart new private investment. The NDA is now realising that the the growth collapse during the last few years of UPA was substantially due to the falling demand. Industrialists, especially those always complaining about the government inaction, were quite savvy in pinning all the blame on the much touted "policy paralysis", without taking responsibility for their own bad decisions. The same industrialists are now blaming the NDA on various counts.
One gets the sense Modi and his team members have figured this one out. So there is talk across the economic ministries of either the government or the PSUs leading the initial investment push. The budget may lay down an elaborate framework in which the PSUs will drive fresh investment in power, roads, ports and even low cost housing.
The good news is such public investments will not impact the fiscal deficit as the funds will come from the PSU balance sheets. Power minister Piyush Goyal recently said foreign lenders are waiting to lend NTPC upward of $10 billion based on its balance sheet strength. NTPC had issued tenders for taking over power projects which private players are unable to execute for want of funds.
Only foreign companies and PSUs have cash today. American corporations are sitting on $2 trillion of cash. With the right mix of tax incentives and procedural easing, the government could attract them in technology intensive sectors such as defence, green energy, smart cities and others. The business community will look for a comprehensive road map on this aspect. While overall demand is yet to pick up, infrastructure demand is still higher than its supply. The government can sieze the opportunities here. Power, Railways and Roads, driven mostly by PSUs, can add about 3 percentage points to GDP over some years.
Arun Jaitley is lucky the government balance sheet is on the mend because of the sharp fall in oil prices. He has already raised excise duty three times which will give him over Rs 60,000 crores during 2015-16. A 5 percent customs duty on oil will also get him something of that order. He is getting handsome receipts from coal and spectrum auctions. Add half a dozen juicy PSU divestments and Jaitley is in a sweet spot fiscally over the next two years. A full GST implementation by 2017 April will create another phase of fiscal stimulus, which will be anti inflationary. If Modi and Jaitley sieze these opportunities they can well rescue the economy from its current state of ennui.
Modi and Jaitley must remain focused on the many low hanging fruits and it will be politically unwise to push the envelope where the political economy shows a sharp resistance. For instance, the finance minister must be cautious while aggressively implementing large scale subsidy rationalisation based on cash transfers to the 11 crore bank accounts in lieu of existing delivery systems that are working well in many parts of the country.
The governments of Madhya Pradesh, Orissa, Tamil Nadu and Chattisgarh have written to the Centre saying the PDS system for food grains is working well in their states and that they do not want to shift to the cash transfer system. Modi must allow the states freedom in running such programmes. On the one hand the NDA is claiming credit for giving states greater spending freedom by substantially enhancing the non-plan funds transfer as recommended by the fourteenth finance commission. On the other, it is imposing systems, like cash transfer, from the top. BJP's own governments in MP and Chattisgarh are resisting such attempts.
Modi has squandered a lot of political capital over the past 9 months. He needs to preserve carefully whatever he is left with. The time for hyperbole and grand standing are over. Some old style politics marked by goodwill and accommodation is called for. The budget is a good opportunity to signal that.
Author is Executive Editor at Amar Ujala Publications.
Source - first post.