A rough road indeed to acchhe din

As the Government prepares to present its first Budget on July 10 surely the new finance minister must be bemused by inauspicious signs. How does he keep up the acchhe din theme song? The monsoons have been delayed. It’s impact will be felt on prices at a time when inflation has shown no signs of easing. Inflation was once an issue that brought people out on the streets and governments down.

No longer. It is only the RBI that seems to bother with its continuous carping on sticky prices and inflation and the likelihood of it staining the blueprint for growth.

How will this Budget address the middle-class’ breathless anticipation of higher growth?

The extension of excise duty cuts on autos and capital goods to December 2014 could be a prelude to more concessions. Those cuts were welcomed by India Inc as a way to shore up buyer sentiment.

But will they? And even if they do the cheer will be short-lived; as short-lived as the fiscal stimulus of 2009-10 by UPA-II that led to some spike in demand for consumer durables that soon fizzled out. It is also possible that the reliefs will cost the Government some. “Fiscal consolidation” through reduction of public spending has acquired the profundity of a faith; but consolidation also implies shoring up revenues. What if consumption does not rise to the bait?

Arun Jaitley may then do the obvious. Reduce income tax levels and raise disposable incomes in the hands of the spenders. But the Central bank, bound to its price stability mandate, may keep its key rates at upper levels; that would offset any cut in excise duties. Any incremental demand for consumer durables may thus be neutered.

Of course, the safest bet would be to pull up private investor sentiment by its bootstraps. The intention to ease land acquisition laws such as they are to a point more favourable for industrial buyers may improve the real estate sentiment (for those world class cities). But will it kick-start productive investments?

That would depend on the economic health of corporate India. Right now it isn’t healthy. A report by the IMF in April 2014 on prospects for the Asia-Pacific region identifies leveraging as a major fault-line in Asia after the 2007-08 crisis.

Using various indices to look at the percentage of corporate debt across the Asia-Pacific, the IMF found Indian firms to be the most leveraged. More than 30 per cent had a ratio of 3 or more, that is, for every unit of common equity, firms in this group had three or more units of debt; another 25 per cent had a leverage ratio of more than two; another 30 per cent had a ratio of more than one.

Conversely, less than a quarter of its firms had a ratio of less than one which means just 20 per cent were free of debt; in contrast, more than 70 per cent of firms in Hong Kong SAR were relatively free of debt with a ratio of less than one.

Against this backdrop, what are the chances of the private sector taking the initiative to pull up sentiment? Pretty thin; not because it doesn’t want to but because banks may not be willing, considering their own asset balance sheets tainted with bad loans, to lend more to leveraged firms. Then again, global interest rates, especially in the US and UK are slated to rise; while the Fed’s taper may have been postponed after the “taper tantrum” of last year it is going to raise interest rates, albeit gradually.

And if it does that, India along with other developing countries will witness capital outflows.

Also, corporate borrowers with such high leverage ratios may not appear all that attractive to global lenders unwilling to hand out good money after bad.

So what are the real, not illusory, options for Jaitley? Like its predecessor soon after the financial crash, the new government may have to depend on public investments to boost confidence.

The stimulus packages that UPA-II used to temporarily boost demand will however not suffice. The Modi Government will need to engage in public spending in key areas to raise the quality of human capital that even in India’s shiniest moments was none too good. Of course, this would mean jettisoning the discourse of austerity, of fiscal consolidation, and the illusion that lower interest rates could do the trick.

Most banks will be reluctant to lend even at lowered rates. They have to clean up their balance sheets first. Of course, the Government could borrow another leaf from the previous government’s book: it could make corporate lending a priority sector.

In its policies, the Government may be also be dogged by the very expectations that brought it to power. It has chosen to pursue the methods of its predecessor in many respects.

On the inflation front, the Government has taken some steps to ease probable and likely supply constraints. These steps sound eerily similar to what earlier governments did — cracking down on alleged hoarders under the Essential Commodities Act and imposing minimum export prices on onions and potatoes as disincentives to their movement outside the country. To what effect?

The familiarity does not end here. The rollback of the proposed rail fare hikes after protests marks the new government’s bow to populism, a backing away from its warning soon after assuming power, of hard times as a precursor to the good times. The protests against the hikes also showed up the naivete of the middle-class approach to the fulfilment of its ambitions and dreams.

It wants a world class rail system: one that can boost their self-image as world class citizens. But the journey to that dream is long and arduous and the urban middle-class traveller does not want it.

It is possible that after the Maharashtra State elections the new Prime Minister might get back to playing tough. It is also conceivable that popular objections may fizzle out as the new middle-classes accept higher fares — just as they are willing to accept higher prices for their onions. A tearful journey to acchhe din , after all.