As 2018 began, there is a certain excitement in the air: with the unintended consequences of demonetization and the introduction of GST ebbing out, there hangs a hope of economy humming.
Of course, there is also a threat in the offing: with the global economy picking up the momentum in a synchronized fashion, there is a possibility of major central banks moving forward with the normalization of their monetary policies. At the individual institutional level there will however be variations. Notable among them would be, the Fed: following the tax reforms, it is entering 2018 with a likely bigger plan to normalize monetary policies with two to three interest rate increases.
The ECB too is likely to nudge its interest rate policy out of the negative regime. Although there appears to be a clash of opinion among the board members, it is more likely to phase out the quantitative easing, more so if the inflation picks up sooner than anticipated. But the US tax plans are likely to challenge the collective wisdom of ECB. Similarly, Japan is likely to play cool on stimulus for the economy to grow. And with Brexit on cards, will England be any different?
Now the big question that daunts countries like India is: what will happen to global economy if all the important central banks simultaneously withdraw monetary stimulus? For, it can choke the growth or lead to a sudden fall in asset prices. Both are dreadful since they can engender debt problem afresh. Managing such a phenomenon in an interdependent world calls for cooperation among the big economies such as the US, China and the European Union. But with the growing threat to the cooperative global political order from the leaders steeped in nationalism, such a threat to the global economy cannot simply be wished away.
Over it, the ongoing upturn in crude oil prices and its diffusion across petroleum products, services and into the underlying inflation is certain to challenge the monetary policy of the RBI. That aside, the government’s decision to expand its borrowing program for the fiscal 2017-18 by 50,000 crore, is likely to breach the fiscal target of 3.2% of GDP. Indeed, this fiscal concern gets further accentuated if we take into account the far lower dividend that the RBI had paid to government. And, if the government, in its anxiety to stick to the targeted fiscal deficit prunes capital expenditure, particularly under infrastructure spending like on roads, it would certainly slow down the momentum of an already sluggish economy. All this commands that Indian policy authorities must keep a vigilant eye over the external front.
Coming to the domestic arena, farm sector continues to cause concern. Even the quality of statistics of agriculture sector causes a concern for there often results a wide variation between preliminary reports and the final yield estimates leading to disruption in market prices besides muddling the growth estimates for the overall economy. The prevailing widespread distress in the rural sector demands for remunerative prices. But such a pricing mechanism may alienate private trade from agricultural commodities depriving the sector the much needed competitive-pricing. A lasting solution to this perennial problem rests not with freebies in the form of free current, free water, free seeds etc. but with the identification of measures for reducing production costs and techniques to improve productivity of land. For instance, micro-irrigation technologies proved to reduce current consumption by 31 per cent and fertilizer consumption by about 28 percent while increasing productivity of fruit by 42 percent and of vegetables by 52 per cent. Amidst such a distressing scenario, one wonders if the government would resort to offering succulence to the farmers in the form of subsidies, more in the light of the fast approaching elections to the Parliament. This phenomenon—of course, if it happens—coupled with the anxiety of various State governments to waive farm loans, is sure to worsen the fiscal scenario.
The other major worry for the economy is: rising NPAs of the banking system and the corresponding debt-burdened balance sheets of the corporates. This twin balance sheet problem continues to throttle fresh investment and growth. The financial stability report of the RBI reveals that the total stressed advances of large borrowers increased by 2.4%, while between March and September SMA-2 loan accounts where principal and interest payments are overdue for more than 60 days had gone up by 57%. This rises a red flag. This, coupled with poor export growth, is holding back economic recovery.
Amidst such a challenging scenario, the only hope is: ‘global synchronous recovery.’ Plus, the recently launched GST should start paying dividends in 2018. In the same vein, the bank recapitalization program should ensure lending picking up. The other structural reforms should also start bearing fruits. The recently announced raise in credit rating from Baa3 to Baa2 by the global credit rating agency, Moody’s Investor Services is likely to stimulate foreign and domestic investment fostering strong and sustainable growth. This also enhances the borrowing capacity of public sector undertakings and the blue-chip corporates from private sector from the global markets at a cheaper price. It would also encourage long-term investors such as pension funds to invest in Indian bonds. In short, the raise in rating grade will boost investors’ confidence about India leading to higher capital flows and allocations.
So, what is needed is: right action from the government to cash in on them. Which means: a big ‘no’ to distribution of pre-electoral largesse. And that alone keeps the hope alive for the Indian economy to grow shining.