Mumbai: As the new Cabinet of ministers takes oath and gets down to work, the burden of expectations on it might be heavier than last time. Extraordinary hopes will be pinned on the next finance minister when he rises to present this year’s Union Budget.

The expectations emanate from a cross-section of society: rural, urban and corporate. Reacting to the re-election of the Bharatiya Janata Party (BJP), N. Chandrasekaran, chairman of Tata Sons, said: “It is an endorsement of the reforms and huge changes underway that will bring growth, jobs and a better quality of life for all citizens." Uday Kotak, managing director (MD) and chief executive officer (CEO) of Kotak Bank, remarked: “Time for the transformation of India. Time for deep reform."

The economy is showing the same signs of stagnation that were in evidence when Prime Minister Narendra Modi’s first Cabinet was sworn in on 26 May 2014. While the electoral verdict doesn’t necessarily indicate the electorate’s satisfaction with the economy, it does afford the government an opportunity for policy continuity. Unanchored expectations of a slowdown, or future stasis, are like to be self-fulfilling prophecies. The United Nations World Economic Situation and Prospects has marked down India’s gross domestic product (GDP) growth for calendar 2019 to 7% and 7.1% for 2020, lower than projections made by the International Monetary Fund’s—7.3% and 7.5%, respectively.

The economy is in an unmistakable funk with the twin engines of growth stalling: consumption has slowed down and investment is in the grip of inertia (see chart 1). Re-starting these engines will require a concerted effort from ministers once they settle down into their assigned roles. The deceleration is most manifest in the rural economy.

Here are a few examples of the slowdown: Hindustan Unilever Ltd (HUL), the bellwether stock for consumer goods, reported a slower-than-usual 7% growth in its top-line; Godrej Consumer Products Ltd (GCPL) reported only 1% growth in its domestic branded business volumes. Mahindra & Mahindra Ltd reported lower tractor sales, a sure sign of slowing rural demand. During 2018-19, only 3.38 million passenger vehicles were sold, posting the slowest growth of 2.7% in the past five years. Two-wheeler sales at 21 million units showed a growth of only 4.9%, compared with 14.9% in FY18.

Given the disturbing signs, corporate India will understandably be expecting the government to provide an economic stimulus. Rashesh Shah, chairman and CEO of Edelweiss Group, said: “The government can be more ambitious in trying to fire up the economy, through a fiscal stimulus, with possible support on the monetary side too."

So, what needs fixing? Two things top the priority list: liquidity and the rural economy. The other urgent areas are fuelling investment demand and reinvigorating investment in infrastructure projects. Pawan Goenka, MD of M&M, said: “The inclusiveness of the growth, the rural reform agenda, the infrastructure development agenda clearly have to remain at the front, but this in itself will not be enough to give us the double-digit GDP growth. The immediate job for the government has to be to get the consumption cycle going which has been on a pause mode for the last several months."

Urgent concerns

The immediate concern, though, is liquidity tightness which has gummed up the entire financial sector, imperiling credit growth, and threatening the survival of numerous players in the segment. Even HUL chairman Sanjiv Mehta has cited liquidity tightness to explain the slowing growth. The liquidity tightness was a consequence of various factors converging around the same time: the ill-effects of demonetization, slower credit growth due to non-performing assets (NPAs) ballooning on bank balance sheets, Reserve Bank of India (RBI) shifting its monetary policy from a neutral liquidity stance (adopted by former governor Raghuram Rajan) to a deficit stance past October 2018 (ostensibly to keep inflation under check), and a slowdown in government spending.

The ensuing liquidity tightness also highlighted the flawed asset-liability mismatches within non-banking financial companies (NBFCs): they had been borrowing short to finance long-term assets but were unable to refinance their debt once liquidity tightened. Currently, rating agencies have downgraded or put on watch papers of many NBFCs, making it further difficult for them to borrow or refinance existing debt.

There is near unanimity that one way to start unclogging the liquidity pipeline is for the government to re-start spending, even as the RBI works to bring systemic liquidity back to neutral. This way, some of the government’s cash parked with the RBI can start circulating and spur some economic activity. A word of caution might be necessary: it will take at least a couple of months before the government’s spending moves through the system and starts making an impact. Government spending though has another benefit: it begins to rekindle consumption demand, which then feeds into a virtuous cycle of economic regeneration.

Another alternative to stimulating consumption demand might be to revisit existing tax rates, especially goods and services tax (GST) slabs. There have been demands from various industry bodies to simplify the GST rate structure.

Reviving rural demand

The rural economy will demand the government’s undivided attention, especially since farm distress over the past year has eroded spending power. The industry also expects the government to provide some kind of impetus to the rural economy. This becomes even more imperative with a deficit monsoon predicted for FY20, which is expected to have an adverse impact on agriculture output and farm incomes. As it is, estimated agriculture growth during FY19 is 2.8% (according to the second advance estimate), the slowest in the past three years.

The government, therefore, has to take pole position in rural revival. Rural expenditure has remained within 7-10% of total spending and would perhaps see an upward nudge. Former finance minister Arun Jaitley’s interim budget, and subsequent promises made in the BJP’s election manifesto proposes to pay every farmer 6,000 every year (payable in equal instalments of 2,000 every four months). Plus, a pension scheme for farmers attaining 60 years of age is also likely to supplement farm incomes over time. In addition, the slew of loan waivers across states—though uneven in coverage—is also likely to marginally help in farm income accretion. In addition, the government has announced a number of farm schemes in the past which are likely to help in income generation. These will take some time to wind their way through the economy and provide the required stimuli.

A research report from Credit Suisse says: “The rural stimulus of direct income transfer to farmers… will get fully rolled out only post elections in June. After that, we expect a minimum lag of 3-4 months for any impact to show up on consumption and company revenues. Thus, we do not expect any recovery in the first half of FY20 and the earliest possibility of a pickup will be in the second half of FY20."

If the second Modi government does keep to the promises made in the manifesto, there is enormous scope for the private sector to participate in the rural economy, apart from the consumer staples firms directly monetizing the increased consumption demand. The government has committed to investing 25 trillion to improve farm productivity. Even though details are yet to be spelt out, there could be scope for the private sector to be involved in the roll-out of the proposal. In addition, the government has promised to build an extensive network of warehouses for the agriculture sector, a project which will again require the participation of the private sector.

The second fulcrum for rekindling growth impulses will lie in rousing the “animal spirits" of investment. The government’s focus on improving ranking in the Ease of Doing Business league tables has not yet yielded the dividends, either in the volume of domestic investment or through foreign direct investment (FDI).

The BJP manifesto also looks at reviving the Make In India programme. A necessary adjunct to propel it will be to revive all infrastructure projects which have been stalled (see chart 2) for a variety of reasons, including excessive bureaucracy.

There will be the usual panic calls from fiscal watchdogs to restrain the government’s spending. However, reviving economic growth is a priority and some of the expenditure can be funded through the balance sheets of state-run firms that have used their balance sheets in the past year to meet the government’s disinvestment and fiscal deficit targets.

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