by Harish Gupta, National Editor, Lokmat Group
As the date for 2016-17 Union budget advances, one cannot but have the impression of ‘driving’ a car on a game console. A lot of sound effect, and dizzy images of speed. But when the game is over, you can see the image of the car right on the spot it was. No action, no distance covered.
Last year, as Finance Minister Arun Jaitley presented the budget, he claimed that he had “restored credibility” of the annual presentation in nine months flat. Sure he has, if you’re still playing the video game, and not quite driving. The economy grew at 7.3 per cent in 2014-15 and will growth at 7.6 per cent (or so) this fiscal. And, bravo, that calls for a big hand, as no other country is anywhere near it, not even China.
But the lighthouse in the dark ocean does not shine too bright as one gets closer. Balance sheets of banks, both government and private, are tattered. The stressed bank assets, as Minister of State for Finance Jayant Sinha puts it, are at staggering Rs 8 lakh crores. These alone may require big recapitalize fund and worrying the PM. RBI Governor Raghuram Rajan gave the banks ultimatum last week that they clean up their act before April 2017. An unprecedented demand compression has hit all economies, including India. Yet India is growing. How?
The driver for the “expected” 7.6 per cent growth is high consumer spending in the urban areas. In the year ending January last, personal loan has increased 14 per cent while bank credit as a whole has grown just 5.4 per cent. Credit growth is insignificant in the manufacturing sector. Its in the negative in mining and quarrying. In the same period, though, credit card loan has increased 24 per cent. Much of this spend has gone into buying cars, household products but very little has powered investment. It explains the worrying lack of substance in the NDA government’s growth story.
Besides, the new GDP calculation method is different from the past in two significant ways. First, it measures industrial growth not on the basis of factories listed under the Annual Survey of Industries. Its now lists all firms registered with the Ministry of Company Affairs, about 400,000 in number. These include even firms with nebulous account books. For example, the notorious chit fund companies of Bengal and Assam would not have been counted in the old GDP method but are included now. Besides, the old method excluded indirect taxes (like VAT and excise) but included subsidy. The new GDP includes product taxes and excludes product subsidy, like subsidy on, say, drugs, or foodgrains. Is it an accounting jugglery? The question is irrelevant as most countries use the GDP figures to measure growth at regular intervals. But India had a different compulsion, which is of wresting the champion’s trophy. The growth may be due to debt-fuelled private consumption, but who cares?
Secondly, for three consecutive quarters since April last, there has been erosion of thousands of jobs in the industrial sector. The industrial and manufacturing indices are both languishing in the red. No large private sector project, both domestic and foreign, has taken off so far. The stock market has become a nightmare. Many middle class investors who risked their life’s savings in equity-based mutual funds have helplessly witnessed their wealth melting away as quickly as a flash flood. And, with no reform in sight in parliament this Budget session, it will further dampen investment.
Prime Minister Modi, alarmed by a woeful rise of 2.8 growth (December 2015, year on year) in overall investment, is pressing on gas with 34 per cent increase in public capital spending. But PSU companies too are facing cash crunch. And so are their contractors, and, in turn, their banks. About 20 major road projects worth US $7.5 billion are stuck including India’s largest and strategically important road project. India’s debt dynamics have made investment virtually impossible for domestic companies. The country’s debt to GDP ratio will hit 50.8 per cent in March, according to a Reuters’ estimate, rising from 46.8 per cent in 2014-15. Jaitley often complains that he may fall short of his fiscal deficit ratio due to the Congress’ opposition to GST Act. While there is some truth in his claim, it is also a fact that the economy is actually sinking under an ocean of debt.
Drop in world oil price, with 75 per cent fall in the price of Brent crude in the past 19 months, was a window of opportunity for an oil-importing country like India. It is said that for every 10 per cent fall in oil GDP improves from 0.1 to 0.5 per cent. But India has used its saving on oil import cost largely to paper over its deficit, not to improve efficiencies. For instance, taxes on petrol and diesel have now exceeded their cost of production. But little effort is made to spur R&D spend on improving fuel efficiency of petrol engines. Pending projects may have been cleared in a big way and Narendra Modi’s PRAGATI may be a successful platform. But public spending has not risen significantly as promised. Modi is still busy fixing nuts & bolts of the bad economy “inherited” two years ago. But its time, the Budget on February 29 brings “Achchhe Din” as people have started losing their patience.
It seems the government carries in its head some half-baked ideas of neo-liberal economics. It thinks skill development is a substitute for basic education, insurance is the alternative to public health services, or ‘bullet trains’ must come before improving suburban train services. In a poor country like India, Jaitley’s budget must not become like the French queen’s famous advice to the poor to eat cake if they can’t afford bread.
