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The focus has to be on reforming public sector banks and on managing the fiscal situation, at the Centre as well as in states. There may not be any reforms until the elections are over. Hopefully, the year will see significant resolution of the bad loan problem and further improvements in GST.


Let me wish all the readers of The Financial Express a very happy 2019! Being an election year, there will be a lot of excitement though, it appears, the focus of policy initiatives will be more towards immediate electoral gains rather than structural reforms. In fact, writing on January 4 in this paper last year, I had stated that there is only a short window for reforms before the election fever grips and had cautioned, “Unless proper policy framework is put in place…, the promise of doubling farm incomes … will come to haunt in the general elections. The county needs to create at least a million new jobs every month to take care of the addition to new work force and migration of workforce from the farm sector. With children in the age group of 0-14 constituting 40 per cent of the population, there is much that needs to be done to secure their future. The immediate task is to revive the investment climate which has been badly bruised on account of both structural factors such as twin balance sheet crisis and transitory factors like disruptions caused by demonetisation and suboptimal design and implementation of GST”. Unfortunately, most of the issues have remained unaddressed.
The macroeconomic environment in the country which looked fragile only a couple of months ago, looks better now. The economy is projected to grow at 7.5% and the price situation is well under control. The current account deficit, which was of some concern, no longer looks threatening. The softening of oil prices has helped to stabilise the exchange rate and the current account deficit. However, some concerns remain, give, while the capacity utilisation has reached comfortable levels, new investment cycle is yet to start. Some of the employment-intensive sectors are yet to recover fully from the policy-shocks.
During 2018, the economy has shown a gradual recovery after the disruptions from demonetisation and implementation of GST. The GDP growth recovered to 8.2% in the first quarter of the year from 5.6% in the corresponding quarter last year. In the second quarter, however, the growth rate moderated to 7.1%. The financial, real estate and professional services along with manufacturing sector continue to show weaknesses. In the agricultural sector, apart from the moderate growth of 3.8%, the declining prices underline one of the root causes of farm distress. In the second quarter of 2018-19, the growth of GVA from the agricultural sector in constant prices (3.8%) was higher than that the growth at current prices (2.8%), indicating declining prices of farm products!
One of the most important initiatives of this government was legislating the Insolvency and Bankruptcy Code (IBC) and the setting up of the company law tribunals. These were clearly the need of the hour to deal with the humongous twin balance sheet crisis. RBI added teeth to the entire process through its February 2918 circular. In a situation where the borrowers do not want to give up their hold on companies and yet are not prepared to pay up, and where the lenders are not willing to decide on the haircut, the matter lingers on and it is necessary to put a firm limit on the days required for resolution. While the implementation of IBC and the operationalisation of NCLT/NCLAT have much to commend, they are still a work-in-progress and, hopefully, 2019 will see some significant resolution of bad debts. As regards public sector banks, the huge amount of taxpayers’ money used for recapitalisation is not accompanied by any reforms, which should be the agenda for the current year.
The issue of bad loans will continue to haunt the public sector banks despite large amounts used for recapitalisation. The gross NPS (GNPA) in March 2018 was 11.6% of the assets of scheduled commercial banks, and it was as high as 15.6% for public sector banks. There have been subsequent cases of default and GNPAs have remained at elevated levels. The IL&FS fiasco underlined the fragility of the non-banking finance sector and has further added to the problem of stressed assets in the banks. The result is that lending to small and medium industry that had been already squeezed by the policy shocks has been severely constrained. There has been a commendable effort at reforming the structure and operational details of GST and hopefully, the efforts will continue. Reducing the number of rates and cesses is important but equally important to make the GSTN fully functional. This would require a rethink on the threshold—increasing it to Rs 50 lakh will reduce the number of registrants by over 50%, but the revenue loss will be less than 4%. Reduced numbers will make the technology platform efficient, help to focus on the real taxpayers and improve tax compliance.
The fiscal situation in the country continues to be under severe strain, and with the impending general election, there is a severe danger of setting the clock back. The finance minister has continued to assert that the fiscal deficit target for the year will be complied with. The GST collections have lagged the budget estimates. The government will minimise the shortfall by claiming undistributed collection of cesses and IGST. There will also be additional allocations needed for Ayushman Bharat, additional food subsidy bill due to higher minimum support prices, more funds may be injected to Air India and additional provision may have to be made for MGNREGA.
The problem is not merely with meeting the target, but how it is done. Postponing payments to Food Corporation of India, oil and fertiliser companies has become a time honoured practice. The FRBM Compliance Report of the C&AG stated that the unpaid bills and lower devolution to the states together amounted to Rs 1.87 lakh crore in 2015-16. The novelty this year is, instead of clearing the bills to the Food Corporation of India, the company was given a loan of Rs 25,000 crore from the NSS Fund to manage its liquidity so that the government can claim to have complied with the target! The disinvestment target will be achieved by the Power Finance Corporation buying out Rural Electrification Corporation. Long live fiscal consolidation!
The fiscal situation of the states is likely to turn fragile. The farm loan waiver poses the greatest risk to fiscal consolidation. As the states have to seek permission of the Centre to borrow, limiting their borrowing to conform to FRBM limits will crowd out capital expenditures which will have adverse effects on growth. Already, there is additional outgo on account of UDAY, and escalation in subsidies and transfers is the last thing that is needed now.
In any case, there may not be any reforms until the elections are over. Hopefully, the year will see a significant resolution of the bad loan problem and further improvements in GST. Let us hope structural reforms will be initiated to revive the investment cycle and to generate the much needed employment in the country.

The author is former Director, NIPFP, Member, Prime Minister's Economic Advisory Council and Member Fourteenth Finance Commission, currently  Counsellor at The Takshashila Institution. This piece first appeared in Financial Express, January 01, 2019.

The views expressed in the post are those of the authors only. No responsibility for them should be attributed to NIPFP.
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