Going into panic mode will not help the government face challenges on the economic front that are turning out to be some of the stickiest since 2014. Complacency and inaction also cannot be an option for the government that has been saddled with adverse impact of US Fed measures, trade wars and the steep increase in oil prices. If the two-day review meeting on the economic situation is any indication, prime minister Narendra Modi, PMO, RBI governor Urjit Patel and finance minister Arun Jaitley seem to be on the same page on the crisis on the economic front. Generally, it is rare for the RBI governor to be part of the government’s exercise to deal with economic challenges like twin deficits, the economic growth story getting derailed and implication of 11 per cent rupee depreciation vis-à-vis the US dollar since January this year.
The package of measures announced last Friday to deal with the currency crisis and widening current account deficit (CAD) at 2.4 per cent are modest. Encouraging Indian companies to borrow more in international market through external commercial borrowings window, easing the norms for foreign portfolio investments, removal of withholding tax on masala bonds and curbs on non-essential imports may have a salutary impact on the external front. Floating a fresh issue of sovereign bonds for external markets denominated in rupee could have been an option for the government and the RBI to curb the steep slide in the Indian currency.
These measures could show results in the next few months only if global investors perception on emerging markets improve and India is no exception to this phenomenon.
From raising the prospect of phasing out CAD in 2014, today the government seems to be fighting with its back to the wall to just contain it below two per cent. And, it is a factor that may not allow rating agencies to designate India with a more positive outlook. Secondly, the government’s optimism about mobilising Rs 22.45 lakh crore in tax and non-tax receipts, divestment of government holdings in PSUs and debt borders on being unrealistic. The government will have to rely heavily on direct taxes mobilisation that in turn may be on account of 71 per cent increase in the number of tax returns filed and anti-black money measures. Anti-evasive measures may have to be more stringent, if the government’s mobilisation through GST crosses Rs 1,00,000 crore every month.
Optimism on containing fiscal deficit at the budgeted 3.3 per cent could again be misplaced a wee-bit. The difficulty would be in achieving this target without selling Air India partly due to opposition from RSS chief Mohan Bhagwat. The government’s determination to stick to fiscal prudence without compromising on capital expansion and expenditure is a big positive. In effect, the government will not reduce its spending in the penultimate year ahead of elections in swing states and Lok Sabha in 2019. The Centre’s assessment of achieving 7.5 per cent plus growth in the this financial year could lay firm basis for the next government.
Concomitantly, BJP chief Amit Shah’s announcement in Hyderabad that the government is working on a strategy to provide relief on petrol and diesel prices is interesting. One way could be to slow down crude imports by 10 per cent that could ease the burden on the government in the interregnum. Secondly, without dipping into $400 billion foreign exchange reserves, if the oil import bill could be cleared through current earnings, then half the war on the economic front will be won. The government should seriously consider pruning its administrative expenses. Austerity is the mantra all over to keep the economic growth story going.