India’s general elections are to be held in April or May 2019. This is an apt moment to review the macroeconomic performance of the current BJP-led National Democratic Alliance (NDA) that assumed power in 2014 and its predecessor, the Congress-led United Progressive Alliance (UPA). The purpose of this column is two-fold. First, to make a neutral and balanced assessment of the country’s macroeconomic performance. Second, to identify the priorities of the incoming government in 2019.
The positive investor sentiment stemming from BJP securing a majority in the 2014 general elections coupled with the soft interest rate regime and declining oil prices that prevailed globally resulted in the aggregate market capitalisation of the BSE and NSE more than doubling to ₹31,651,941 crores as of August 31, 2018, and moderated to a still impressive ₹28,769,410 crore as of September 30, 2018. Market capitalisation appreciated by a modest 21 per cent to ₹14,693,016 crores as of March 31, 2014, since March 31, 2010 (UPA’s tenure).
Crude oil prices
The NDA was fortunate to assume power at a time when crude oil prices were declining globally. Average annual crude oil prices more than halved from a peak of $107.20/bbl in 2011-12 to $46.04/bbl in 2015-16 before rising to $72.86/bbl during the seven-month period April-October 2018. This, along with RBI’s inflation targeting measures, resulted in India accumulating the tenth largest foreign exchange (FX) reserves globally.
The current account deficit as a percentage of GDP had dramatically declined during the first three years of the NDA regime before increasing to 1.90 per cent in 2017-18. The RBI has stated that this is not a cause for concern as our FX reserves are adequate to meet ten months of imports.
The NDA outperformed the UPA in its focus on improving India’s ‘Ease of Doing Business’ ranking to 77 out of the 190 nations in 2019 from 139 in 2010. The passage of the 2016 Insolvency and Bankruptcy Code (IBC), Real Estate (Regulation and Development Act) and 2017 GST bill have strengthened India’s business framework.
GDP growth is one area the NDA did not meet expectations. The November 2016 demonetisation resulted in real GDP growth decelerating to 7.1 per cent and 6.7 per cent in 2016-17 and 2017-18, respectively. Rising crude oil prices, the declining trend in gross capital formation and deployment of bank credit also contributed to the lower GDP growth in 2017-18.
There was heated debate in February 2015 when the Ministry of Statistics & Programme Implementation (MOSPI) released a new series of national accounts, revising the base year from 2004-05 to 2011-12. The new series of national accounts, in addition to highlighting the robust growth under the UPA-I (2004-09) government, also conformed with international standards by comprehensively covering the manufacturing and services sectors, activities of rural and urban local bodies, and incorporating the results of the Unincorporated Enterprise Survey (2010-11) and Employment-Unemployment Survey (2011-12).
The NDA’s track record in controlling fiscal deficit is as lacklustre as the UPA’s. Both regimes have been unsuccessful in moderating the combined fiscal deficit of the Union and State governments to below 6 per cent and the government debt as a percentage of GDP to less than 60 per cent.
These two parameters have constrained India’s sovereign credit rating. S&P and Fitch have assigned India their lowest investment grade ratings of BBB- while Moody’s has rated India a notch higher at BBB.
A higher sovereign rating is warranted as India’s debt and non-performing asset (NPA) levels are lower than those of countries with higher ratings like Italy and Span, sovereign debt is predominately denominated in INR, and the passage of IBC and GST bills would result in lower NPAs and higher tax buoyancy.
The increase in scheduled commercial banks’ ratio of net NPAs to net advances is an outcome of the implementation of IBC and the RBI enforcing the prompt corrective action (PCA) programme to bolster the weaker banks. These measures would strengthen India’s banking industry.
The number of income tax returns filed increased significantly to 6.85 crore in 2017-18 from 3.80 crore in 2013-14, the last year of UPA’s tenure.
While the NDA attributing this to demonetisation is debatable, the improvement in tax administration will aid in reducing the fiscal deficit. An ambitious ₹1 lakh crore divestment programme in 2017-18 is yet another arrow in the government’s quiver to reduce the fiscal deficit. However, divestment is not the best method to bridge the fiscal deficit at the current juncture for two reasons.
First, the Indian stock market is choppy and hence the divestment proceeds the government is likely to secure will be lower than those obtained during a bull market. Second, the 27 largest listed central public sector undertakings (CPSUs) have accumulated ₹2,06,837 crore ( around $29 billion) of bank deposits, loans, and investments that yield a lower return than their core businesses.
CPSUs may dispose these assets along with the vast surplus property holdings to reduce their debt, enhance their dividend and tax-paying ability and improve their return on assets and valuation. By streamlining CPSUs’ balance sheets, the government will be able to reduce the fiscal deficit and realise higher divestment proceeds during a bull market.
The priorities ahead
Political analysts predict that the NDA will be voted back to power, albeit with a lower majority in 2019. Irrespective of the election outcome and with the global macro economy facing heightened trade war, interest rate and crude oil price risks, the priorities for the incoming government are clear.
Water management is under the jurisdiction of States though the Centre may, as per the Constitution, deal with inter-State rivers if Parliament legislates so. Water management needs to be moved to the concurrent list to improve agricultural productivity and reduce inter-State disputes. The unemployment problem, as manifested in India’s low labour force participation rate, needs to be addressed urgently.
The rationalisation of CPSUs’ balance-sheets is a low-hanging fruit that will result in an exponential increase in the government’s tax and dividend receipts and improve CPSUs’ valuation.
Gross domestic savings and gross domestic capital formation (GDCF) as percentages of GDP have been declining from the 2012-13 peaks. The 2017-18 Economic Survey demonstrates that the slowdown in GDCF has a far more adverse effect on a country’s growth.
The government needs to expeditiously revive GDCF to achieve real annual GDP growth of at least 8 per cent consistently in the medium term.
The writer is an independent analyst.