Economy: Modi Has To Move Fast

Even though the economy has improved under the new government, this article explains there are sectors in the economy which are still not completely out of the mess.

There are sectors in the economy which are in deep trouble. If these problems are not tackled quickly, mere GDP growth will not bring any succor to the masses who vote and the people who have reposed faith in Modi’s promises.

As statistical news trickles in that the Modi government’s classic Keynesian effort to revive infrastructure with massive public spending (up 19% since April), may be working. But as per a Reuters report of 14th October, some of the inter-related sectors are in deep trouble.

These include housing and commercial construction, farming/rural income, industry—its under-utilisation of capacity, and banking—inadequately sized/ under-capitalised, with huge NPAs. They all have deep financial and structural problems inherited from the previous government, but this one has not been able to make a dent in any of them in over 16 months either.

Though the GDP has been dragged up from lows of under 5%, mainly on account of a reduced oil bill, to around 7.3% now,  finance minister Arun Jaitley’s projections of 8 to 8.5% coming up next year, will be difficult to stabilise, let alone work up towards double digits thereafter. Not, at any rate, without a composite effort on several fronts. Even if a fortunate glitch from infrastructure takes it there, it is unlikely to sustain if other issues are not tackled.

Raghuram Rajan may have front-loaded a recent repo rate cut of 50 bps, as a response to the criticism that the RBI was stymying growth. However the banks have barely passed on 25 bps of it to the customer, and that too only a selected few from amongst them.

One reason is that the public sector banks alone (PSBs) are carrying 2.67 lakh crores in bad debt as on March 2015, up from 2.16 lakh crores in March 2014. This fact is based on the figures reported to parliament in July 2015 by the minister of state for finance Jayant Sinha. According to other reports, the NPAs are placed even higher, at 3.02 lakh crores in March 2015, up from 2.40 lakh crores in March 2014.

The gross NPA ratio of PSBs has increased to 5.43% as of March 2015, up from 4.72% a year before. This massive bad debt has also affected profitability, though the lack of dynamism in PSBs is another factor, and the annual return on PSB assets has come down to 0.78% in 2014-15, from 1.09% in 2010-11, per the same Indian Express report.

This has a moral dimension too, alluded to on more than one occasion by Governor Raghuram Rajan, who is keen on pushing through a host of banking reforms. All the bad debt in PSBs is public money, loaned out largely to a coterie of crony capitalists under less than stringent conditions.

It is unlikely to ever come back.  To mend matters, the government needs to expedite stake sales of PSBs to the private sector to enhance efficiency and introduce better practices. It will also bring in fresh capital.

And of course, put teeth into both the asset reconstruction companies (ARCs), which are too few, and again woefully under-capitalised, with a net worth of just Rs. 4,000 crores between 15 of them. This puny effort is meant to recover lakhs of crores of bad debt! The bankruptcy laws too need to be made much stronger.

The RBI has been trying to help this along, but even on the recovery side, the statistics for the ARCs, at some 31%, is far from encouraging. Governor Rajan has publicly lamented the lack of consequence for company promoters who can get away unscathed, despite owing thousands of crores to the PSBs as things stand.

The gaps in legislation and regulatory practice have been exploited by influential industrialists and their political backers ruthlessly over the years. Also, many of the given loans flout banking norms, cautionary notes, and so on, and smack of collusion and corruption.

Banking reforms, when, and if, they come to tackle this daylight robbery and hold such borrowers liable, will certainly be a step in the interests of natural justice. It will also enhance India’s fiscal ratings and creditworthiness internationally.  However, since this involves a good deal of vested interest and is a nexus between the rich and the powerful, it remains to be seen what will be done by the Modi administration.

But till then, the bankers are in trouble. They cannot even cut their deposit rates in line with their intended lower lending rates. The small savings rate, controlled by the government in post offices and the like, have not been cut as yet. This prevents, or at any rate constrains the banks from cutting their own savings rate, lest they earn the ire of depositors. But, overall, the Indian banking system is broke, and, therefore, reluctant to lend, compounding a catch-22 situation.

Meanwhile, the construction sector (housing/ commercial property),  remains moribund.  The reason being it cannot raise finances, at least from the Indian banks, to cover their over-leveraged debt acquired in the boom prior to 2012.  They are finding it hard to finish long-delayed projects or even service their debt.

To remedy matters, some are going to the stock market to raise finances, and others are tapping private equity (PE) money. This is working up to a point, though at snail’s pace, because the lenders against equity stakes are hoping to make a killing when the market revives.

Ditto is the case for those privates who are building roads and other infrastructure on a PPP basis. The government is trying hard by way of offering them exits. They have lifted lock-in stipulations for completed projects, but finding buyers at appropriate prices is not proving easy.

While this may be the big picture for the people in board rooms, the construction worker, millions of them, have had to go back to their villages, because there is no work on the projects. And to his dismay, he finds, there is no work on the farm either.

According to a recent report, the rural and farm sector, involving, 833 million people, was living on subsidies and high guaranteed offtake prices in UPA II. But these have tailed off since May 2014. This may have been done partly to curb high food prices and inflation from this source. That has succeeded, but the farmers are left bereft in the process. Since October 2014, rural wage growth has slowed from a respectable 17% to about 3% currently, according to a Hindustan Times Spotlight report datelined October 10th, 2015.

The average daily rural wage for ploughing/tilling in May 2015, says HT, was only Rs. 272.87, just 3.3% higher than they were a year before. This is probably because of a labour supply surplus caused by the construction and road building shut downs. And the inadequate or unseasonable rainfall in many parts not served by irrigation has compounded matters.

Rural demand for goods and services, in the absence of disposable income, has also tailed off. This has left most factories producing 30% below capacity, and impacting the profitability of a host of companies ranging from FMCG majors to two-wheeler and white goods manufacturers.

The truth is, farming and rural services just do not need so many people, and with a 15% contribution to GDP, it is far from profitable. Most people there need to be employed in the urban areas, in construction, which accounts for just as much of the GDP, and industry, even though it needs to grow.

But with industry, construction, etc. down in the dumps, and languishing there, this just cannot happen. Modi has to move fast to tackle these multiple problems. Otherwise the growth in GDP such as it is, will not bring any succor to the masses who vote and the people who have reposed faith in his promises.