Narendra Modi has to address not just the current stagnation in manufacturing but also look at ways of stimulating investments in the sector
Prime Minister-designate Narendra Modi, it is said, sleeps just six hours a day. Even that could become a luxury as he buckles down to his job and begins the challenging task of turning around the economy. The economic legacy handed down to him by the United Progressive Alliance (UPA) government is a troubled one and Mr. Modi may find himself diverting all his energies to first steady the ship before he attempts to change its course.
Slaying the inflation monster
Without doubt, this has to be priority number one, especially because price rise is one of the factors that helped the Bharatiya Janata Party (BJP) vanquish the UPA at the hustings. Yet, reining in inflation right away is something easier said than done.
If inflation was the textbook definition of “too much money chasing too few goods,” it would have been arrested by now as a result of the tight money policy followed by the Reserve Bank of India. Unfortunately, inflation, especially food inflation, is largely a problem on the supply side, an irony if you consider that state granaries are overflowing. There has been little focus in managing the agricultural supply chain over the last few years, whether it is in checking the growth of middlemen or in investing in cold chains to help preserve fruits and vegetables. A large part of this falls under the purview of the States and that is where Mr. Modi will face a challenge.
Retail food prices are currently spiking and if reports of a bad monsoon triggered by El Niño were to come true, we will be looking at a further rise in retail inflation, which at 8.59 per cent, was at a three-month high in March. In such an eventuality, Mr. Modi could probably order the release of foodgrains from Food Corporation of India granaries as an immediate countermeasure. He can afford to do so without worry given that the country is headed for a bumper harvest of 264.38 million tonnes of grain in 2013-14.
This will be an important task to help rein in the fiscal deficit. The interim budget presented by the outgoing Finance Minister projected a total of Rs.2.46 lakh crore as subsidy on food, fuel and fertilizers for 2014-15 and including the Mahatma Gandhi National Rural Employment Guarantee Act, this will be over Rs.2.80 lakh crore. Mr. Modi will need to take a close look at fuel and fertilizer subsidies which are a massive drain on the economy without the attendant benefits. Leakages from fuel subsidy are considerable and they have also been leading to other problems such as adulteration of diesel with kerosene.
Mr. Modi will have to take some tough decisions, especially on cooking gas subsidy, where the outgoing dispensation attempted half-hearted reform. Given that this issue touches the middle-classes, who are one of his biggest support bases, Mr. Modi may find himself in a spot. Yet, he has no option but to drain the subsidy element from cooking gas if he has to cap the overall spending.
Tackling diesel subsidy is another tricky job because a rise in the price of this fuel, which is largely used for transportation, will have a cascading effect on the economy with an adverse effect on inflation. The enactment of the National Food Security Act means that food subsidy, projected at Rs.1,15,000 crore for 2014-15, will rise sharply in the coming years. It is likely that the BJP government will tweak the legislation but the fact is that Mr. Modi has to find the resources to fund this Bill.
Bank balance sheets, groaning under the impact of rising stressed assets, need to be repaired first before the new government focusses on driving investment. Banks, mainly public sector but also some private ones, are chary of lending given that they are grappling with non-performing corporate loans. A recently prepared document of the Finance Ministry estimates gross non-performing assets as of March 2014 at 4.44 per cent of total advances, which is the highest level seen in the last eight years.
Some of this constitutes bad lending decisions by banks while others are genuine project lending where repayment has been affected due to delays in implementation or the projects not taking off due to lack of clearances. Mr. Modi’s mandarins have to carefully sift through this list to ensure that the bad apples are separated from the good ones that need support.
The government may also have to look at recapitalisation of some of these banks but if the stock market surge continues, then banks can look for support from there to raise capital. Either way, focussing on the health of banks has to be an important component of Mr. Modi’s “to-do” list.
There are about 10 million young Indians entering the workforce every year in search of jobs. While the service sector has done well in the last decade and more, the real impetus to job creation can only come from manufacturing.
The share of manufacturing in GDP fell to 15.1 per cent in 2013, which is the lowest in a decade according to the Confederation of Indian Industry. A Planning Commission report points out that the manufacturing sector contributes as much as 34 per cent to China’s GDP. While this little statistic tells its own story, the fact is that the economy can grow and jobs can be created only on the back of a healthy manufacturing sector.
Mr. Modi has to address not just the current stagnation in manufacturing, which is largely cyclical, but also look at ways of stimulating investments in manufacturing in the medium-to-long term. There are favourable winds blowing with the problems in Chinese manufacturing now, which is forcing multinationals to look at other options globally to shift base. The rupee, despite its recent appreciation, is still in territory that should be positive for exporters from India. The new government should capitalise on these trends to attract investment.
Getting infrastructure going
A policy paralysis caused partly by the telecom and coal scams and partly by pressure from environment lobbies held up clearances and, consequently, investment in critical infrastructure projects in the last three years of the UPA government. Mr. Modi has to concentrate on getting these projects started before turning his focus to new projects in power, roads, mining and transport.
The power sector is in a mess due to reasons ranging from financial sickness of state utilities to constraints on fuel availability. The new government will have to re-examine the policy on coal mining and throw the industry open for foreign direct investment. The natural gas sector is embroiled in controversies that are holding up its development. Mr. Modi will be treading tricky terrain trying to untie the knots given that large industrial groups are interested parties; yet, he has no option but to take the issues head on and solve them.
Clearly, there are tremendous expectations from the Modi government on the economic front. The stock markets have surged in anticipation of good times while foreign portfolio investors are waiting to write out their cheques. Mr. Modi’s victory and importantly, the mandate he has secured, have generated positive sentiment in business and industry. It is now up to the man himself to ensure that this sentiment is sustained and capitalised upon.