Jaitley Pushes IMF Cautious

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Finance Minister Arun Jaitley (L), Prime Minister Narendra Modi (C) and Managing Director of the International Monetary Fund Christine Lagarde (R) look on during the inauguration of the conference “ Advancing Asia- Investing for the future” in New Delhi. PRAKASH SINGH / AFP

The NDA government led by the Bharatiya Janata Party (BJP) is now on the cusp of a crucial phase ahead as it is about to complete its second fiscal year, taking the truncated span of ten months of its inaugural year after it swept to power in May 2014. The economy today is limping back to new normal phase of seven per cent growth, even as major economic reform measures expected of this government (enjoying popular support and credible numbers in the lower house) remain hamstrung.

Obstruction by the opposition is only part of the alibi for lack of any bounce in the economy. It’s also due to a business-as-usual approach and the fear factor among bureaucrats due to over centralization of power in the hands of Prime Minister Narendra Modi.

All were responsible for the lack of “vroom and traction” required to pull real sectors of the economy on a higher trajectory. With agriculture and industry, the two vital legs of the three-legged stool of the real sectors of the economy in limbo for two consecutive years, the government’s goal of pushing up growth and generating employment risks getting derailed, particularly as the time ahead for bold action would not be available in the pending two budgets it will present.

JAITLEY’S BROWNIE POINTS

Already, the first two budgets of the NDA were made without taking even reasonable risks, for which the BJP was squarely blamed for following the policies of the erstwhile UPA dispensation. So this time around, the feisty Finance Minister Arun Jaitley perforce wore the mantle of mettle, grit and gumption in the third budget he presented on Feb. 29. Without demonstrating any leap into embracing big bang reforms the list of which is long and known (such as acquisition of land without hassles, flexible labour policy and early launch of the much-vaunted Goods and Services Tax (GST)), Jaitley managed to score a few deserved brownie points in his third budget.

With the rural economy in a shambles and agriculture languishing for lack of inputs ranging from seeds, water, nutrients to credit, superimposed by two back-to-back droughts and unseasonal rains, Jaitley had wisely focused attention on agriculture and rural development by stepping up outlays and necessary input services, so that farmers income could by degrees be doubled within six years. The gesture to farmers is politically correct, morally apposite and just, though many a critic found holes in the schemes, and in financing farm sector as budgetary sleight of hand.

With government sticking to the fiscal deficit target for 2015-16 at 3.9 per cent and for the next fiscal at 3.5 per cent, the room for pruning consumption expenditure is unenviable, given the commitment to implement the Seventh Pay Commission recommendations to legion of its own staff and also to comply with the OROP (one rank, one pension) for defence personnel. The revealed preference for the fiscal consolidation path set out in the budget and the inherent macroeconomic prudence and stability manifest in such a pledge, triggered pleasant fallouts. This has softened long-term interest rates for bonds, secured valuable insurance in an unstable world and helped the apex bank to find space for potential cuts in policy interest rates.

The third important announcement in the budget which was expeditiously followed up by action, was to table a bill to accord legal backing to Aadhar as the key platform for targeted distribution of government subsidies and benefits. This has been introduced and subsequently passed as a money bill promptly on March 10, requiring passage only in the Rajya Sabha. The massive subsidy on food, fuel, fertilizers would now get directly credited into the account of targeted beneficiaries so that there is scarcely any chance of siphoning off part or whole of such subventions.

IMF CAUTIOUS

Meanwhile, the International Monetary Fund (IMF) has sounded the bugle of caution for the NDA government’s unconcealed zeal for stepping up public investment in the last two budgets (on the presumption that it would crowd in private investment to oil the wheels of the economy). That is the nub of this year’s IMF Staff Appraisal report released in Washington in the first week of March, though the Fund’s Executive Board wrapped up its deliberations on February 12, 2016, prior to this year’s Indian budget.

It needs to be noted that the multilateral lending agency monitors the economic and financial policies of its 188 odd members in what is officially termed bilateral surveillance, or “the appraisal of and advice on the policies of each member” under its Article IV consultation process. In recent years, the surveillance has become increasingly transparent as the IMF had been the butt of attack for its fierce conditional lending on borrowing countries that sometimes scored fiscal goals at the expense of growth!

Without resorting to any hyperbole, the IMF contends that despite a strong public investment impetus, “policy challenges remain” for India. Interim multiplier estimates suggest that one additional rupee in public investment leads to an increase of about 1.1-1.25 rupee in private investment after a hiatus of two years. Having said this and also acknowledged recent improvement in new investment project announcements, the report notes that broad-based private investment would hinge on progress in “resolving corporate balance sheets stress and enhancing banking system buffers commensurate with an investment-driven economic recovery”.

No wonder, one sees a flurry of activity in recent days on the banking front with non-performing assets (loans) hogging the limelight and how banks profitability stands shaven due to hefty provisioning for write-off of bad loans!

The IMF is reported to have got around with the Indian authorities, to find durable solutions to supply-side bottlenecks, such as energy availability and natural resource allocation to ensure viability of future public and private investment. The structural impediments identified by the IMF that hobble India, range from rigidities in product and labour markets, inefficient pricing and allocation of natural resources, an uncertain and burdensome business milieu including constraints in acquiring land and regulatory clearances and inefficient agricultural markets, including in the public system for food procurement, distribution and storage.

The list is long and lugubrious, but in a democratic set-up bringing bipartisan political consensus needed to implement at least a part if not the whole of the reform, remains a protracted and plodding work in progress. It is no coincidence that India is about to conclude in a couple of months, its silver jubilee year of economic and trade policy reforms launched in the 1991 budget and subsequently in July of that year by its visionary prime minister, the late Narashima Rao.

An interesting pellet of news from the IMF staff analysis, suggests that the crash of crude oil prices could have contributed up to 1.75 percentage points to the decline in headline consumer price index (CPI) inflation since mid-2014 for India. Interestingly, with deregulation of diesel prices in late 2014 by the NDA government, the fuel subsidy bill has been reduced from about three-fourth of one per cent of GDP to just 0.1 per cent of GDP the IMF said, adding that the excise duties on petrol and diesel have been increased multiple times since late 2014.

Even as petrol and diesel prices are now free to move in tandem with global prices which are on the downhill, their retail prices have declined by around 15-20 per cent from mid-2014, benefitting the public, while the authorities are realizing bonanza from the additional excise duty on this score!

Considering the fact that this year’s budget stuck to the fiscal consolidation path despite fears to the contrary, the IMF’s key policy recommendation that medium-term fiscal consolidation should continue, underpinned by revenue-raising reforms (including by introducing the GST and improvements in revenue administration) and further cuts in subsidies have all the persuasive points duly incorporated save the GST part, policy wonks contend.

Summary

  • The latest budget has targeted the social sector, which is welcome, but the opposition continues to block vital legislation
  • The latest IMF Staff Appraisal Report on India is cautious in its verdict, warning of policy challenges and structural impediments
  • But the IMF’s focus on medium term fiscal consolidation and revenue raising does find mention in the budget
  • Jaitley had wisely focused attention on agriculture and rural development by stepping up outlays and necessary input services, so that farmers income could by degrees be doubled within six years

    Jaitley-Pushes-IMF-Cautious

    Jaitley Pushes IMF Cautious

    The NDA government led by the Bharatiya Janata Party (BJP) is now on the cusp of a crucial phase ahead as it is about to complete its second fiscal ye...

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