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Hard Decisions Needed

Monday, May 19, 2014

The decisive mandate at the 2014 general elections has created the best environment in a long time to bite the bullet on government finances so as to ensure a long and healthy phase of economic growth in India.

De-bottlenecking in the short-term, improving the economy’s growth potential and employment generation ability in the medium term should be top priority for the new government. “The new government’s to-do list to revive the economy is a long one, but unfortunately, there is limited ability to use growth-supportive monetary and fiscal policies,” believes  CRISIL.

Typically, monetary (cut in interest rates) and fiscal instruments (increase in government spending) are used to prop up a sagging economy in the short run. However, India has run out of such counter-cyclical policy ammunition as its inflation and deficits remain high and, in fact, need to be trimmed.

Says Roopa Kudva, CEO & Managing Director, CRISIL: “The lowest-hanging fruits are fast-tracking of projects in pipeline and resolving iron ore and coal mining issues. This will improve the efficiency of capital that is now stuck, pave the way for better returns on investment, create jobs, lift income growth and spur private consumption demand.”

The other five imperatives for the new government are...

Taming inflation: This will require better monetary and fiscal policy coordination, reducing food inflation through measures such as dismantling the APMC Act, and also bringing about a sea-change in the country’s storage and distribution capacities for fruits and vegetables. This is particularly important in the current year in view of the rising risks of monsoon failure spurred by El Nino.

Pragmatic fiscal consolidation: CRISIL believes this will entail reducing subsidies and curbing expenditure, and ensuring that the money spent on social welfare schemes create durable assets than remain just cash handouts. It is also critical to simultaneously introduce growth and revenue-enhancing measures such as clearing the long-pending Goods & Services Tax (GST) and improving tax compliance.

Improving asset quality at banks and recapitalisation: The ability of banks to finance higher growth is limited because of the festering problem of bad assets and inadequate capital. We will be looking out for decisive steps on distressed assets and capital infusion.

Encourage debt markets: CRISIL believes India’s corporate debt market needs to be fostered for growth to be sustainably funded. Banks alone cannot deliver the large amount of capital required to build out India.

Booster shot for manufacturing and employment: Steps to revive the manufacturing sector will be critical. Clarity on land acquisition, environmental clearances, better infrastructure, and labour law reforms - such as shifting its purview to the states -- will be critical to improve the business climate and boost manufacturing, which is in its worst phase in the last two decades. India’s manufacturing engine - represented in large measure by micro, small and medium enterprises - needs to do well if its fast-multiplying workforce has to find gainful employment.

Says Dharmakirti Joshi, Chief Economist, CRISIL: “Such an agenda will improve India’s competitive efficiencies and pave the way for its re-entry into the orbit of 6.5-7% annual GDP growth.”

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