Corporate India wants Prime Minister-nominee Narendra Modi to hit the ground running. No one is willing to grant the new government a honeymoon period. Confirmation of Mr. Modi’s victory on Friday elicited a single response from every CEO: the new government must leverage the decisive mandate to immediately undertake bold reforms and rebuild confidence in the economy.
“Empowered with such a decisive mandate, the new government is expected to undertake some bold reforms that will inject fresh momentum into the economy. …the need of the hour is to bring back business confidence and revive the investment cycle through swift and decisive policy making with focus on jobs-led inclusive growth,” said Bharti Enterprises Founder and Chairman Sunil Bharti Mittal.
“The government should focus on re-starting the investment cycle, clearly articulate that investors will be provided an environment of predictability while ensuring sanctity of contract, stability in the tax regime and applicability of legislations prospectively. It should tackle the rigidities in our land, labour and capital markets,” said Naina Lal Kidwai, Chairman, India and Director, HSBC Asia Pacific. There is reason why the exuberance over the decisive mandate so visible in the stock markets — Sensex touched a new-high of 25,000 on Friday — is tempered with caution when it comes to CEO speak on the tasks before the new government.
“The significant parliamentary majority won by the BJP is likely to sustain the investor sentiment which has recently boosted equity indices and the rupee. However, the impact of the election results on the country’s credit profile will only be apparent over the next several months, as economic policy measures are implemented,” warned global ratings agency Moody’s. “While policy measures to revive the economy are likely over the coming months, India’s growth, fiscal, and inflation metrics are unlikely to improve immediately.” Expectations that the BJP would win a considerable majority and pursue policies conducive to investment and economic growth contributed to the more than 17 per cent rise in the BSE Sensex in the three months leading up to the announcement of election results. Foreign portfolio inflows appear to have helped drive the rally.
“However, economic trends will take longer to improve than sentiment did … Economic data published so far this year reveals that industrial output is still weak,” said Moody’s. Industrial output contracted 0.5 per cent in March, the latest month for which official data is available. Furthermore, inflation remained elevated at 8.6 per cent in April. Manufacturing growth and inflation will be two toughest challenges for the new government. Voter impatience is likely to be the highest for the new government to deliver on them, following up on its promise of jobs and relief from price rise.
The first opportunity for the new government to set the momentum and signal its intent through concrete steps will come in a few weeks from now when Mr. Modi’s Finance Minister will present the full-fledged budget in July. The UPA Government has left very little fiscal space for the new Finance Minister with the unavoidable outgoes on interest payments on public debt, subsidies and the government’s salary bill budgeted to eat away bulk of the tax revenue.
To control inflation and send the right signal to the global ratings agencies — that determine the rate at which the Government of India borrows to fund its excess spending over its revenue — the budget must come up with transparent measures to curb the ballooning subsidy bill and new sources of non-tax revenue.
With the rising stock market valuations disinvestment or even outright privatisation of State-owned enterprises, especially the blue chips such as ONGC and Coal India could be one way to do it. This is important as food subsidy could rise if, as is being projected, monsoons disappoint. Raising greater tax revenues will be a herculean challenge in the immediate term.
Tackling the fisc will be key as it also plays a big part in addressing joblessness too besides inflation. “India’s relatively high fiscal deficits fuel inflationary pressures and raise private sector borrowing costs.
Meanwhile, regulatory restrictions that discourage investment pose supply constraints that curtail growth and underpin recurrent inflationary pressures. In addition, limited financing options and high project implementation risks have inhibited the development of India’s infrastructure,” says Moody’s.
As a result, warns the ratings agency, changes in India’s sovereign credit profile do not hinge upon GDP growth alone. Rather, future assessments of the sovereign credit profile will depend on, it adds, developments in the following areas: (1) the government’s fiscal position; (2) the regulatory constraints on investment and output; and (3) growth in social and physical infrastructure. These structural problems have no automatic solutions. The real economy’s challenges persist, warned Citigroup India’s Chief Economist and former consultant in Finance Ministry Rohini Malkani on Friday. The revival will be investment-led but gradual with the pick-up in economic growth a function of (1) pace of policy de-bottlenecking, (2) investment appetite of the corporate sector and (3) extent of the government’s own role in capital formation, Ms. Malkani wrote in a report on the new government. As the corporate sector gets going on stalled projects and plans, the new investments would over time create new jobs and incomes.
Deutsche Bank Research’s prescribed to-do list has on top: get project clearance and implementation expedited, followed by reduce regulatory uncertainty and simplify procedures for clearances. It would also help boost investor confidence appreciably, if the government can set up a single window clearance facility for investment related to infrastructure projects, DB Research recommended.
Mr. Modi will need to create room and buy time for tackling these structural problems, while managing the voter’s expectations on deliverance simultaneously. A savvy Finance Minister will buy time by showering tax breaks on individuals leaving them with more of their incomes to spend or invest.
Says, M. Lakshminarayanan, Managing Partner-Tax, Deloitte Haskins & Sells, it is imperative that the operation be made prospective of the amendment in the Finance Act, 2012, that made retrospective amendments to tax the gains arising from the transfer of shares of a foreign entity in a case where such an entity has substantial assets located in India (as in the Vodafone case): “This legislation has not only created an air of uncertainty in the tax law, it has also created a perception that India is not a tax friendly jurisdiction, which has in turn impacted the flow of overseas investments into India”.
The task on the economy for the new government is, thus, not of doing and undoing alone. It is also of talking to people, to business and to foreign investors.
puja.mehra@thehindu.co.in
