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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Raining Good News

A bigger priority should be to implement a range of tax and labour reforms. As figures released by the income-tax department have shown, far too many resources are expended on taxing assessees with taxable income below Rs 5 lakh

Photo Credit : Reuters


A good monsoon could deliver just the kickstart the economy needs to breach the 8 per cent GDP growth mark in 2016-17. Statisticians are conservative folk but R.B. Barman, the new chairperson of the National Statistical Commission (NSC), says India’s economic growth exceeding 8 per cent this year is “a distinct possibility”.

Other indications are positive as well. According to CRISIL, sales of 642 listed companies in the January-March 2016 quarter rose 6.1 per cent year on year. Ebitda (earnings before interest, tax, depreciation and amortisation) was up by a healthy 15.2 per cent during the same period. Net profit of these 642 companies soared 39.9 per cent. (CRISIL’s analysis excludes banks, NBFCs, oil companies, TCS and Vedanta to eliminate one-off statistical anomalies.) Indirect tax collections too rose 36.7 per cent in April-May 2016 over the same period last year, indicating a surge in business activity.

Private investment should now pick up. Banks have taken a large chunk of NPAs off their balance sheets. The write-offs will help them start lending again. An above-average monsoon will increase disposable incomes in the farm sector where over 60 per cent of Indians work. This could set off a virtuous cycle of consumption-led demand and growth.

Public sector units (PSUs) are likely to invest an estimated Rs 1,35,000 crore in 2016-17, adding further impetus to the recovery. A Confederation of Indian Industries (CII) survey is especially bullish on the economy. It expects GDP growth this fiscal to “easily cross 8 per cent” on the back of a good monsoon.

So what could go wrong?
For a start, oil prices. Crude has already doubled to more than $50 per barrel from its January 2016 lows. An increase of every dollar in the price of oil increases India’s import bill by Rs 9,126 crore, according to Finance Minister Arun Jaitley. India imported 202.10 million tonnes of crude oil in 2015-16 at a total cost of $64.40 billion (Rs 4.35 lakh crore — nearly equal to the fiscal deficit). The average price basket through the last fiscal was around $40 a barrel; a $10 hike to $50 will therefore raise the import bill this year by around Rs 1,00,000 crore. That could have a significant impact on inflation and the trade deficit.

One of Prime Minister Narendra Modi’s stated aims is to increase domestic oil production which has declined gradually over the past two decades. If the current dependence on crude oil imports is brought down from 80 per cent to 70 per cent, it will lower India’s import bill by Rs 65,000 crore at a price of $50 per barrel and an average exchange rate of Rs 67 per dollar.

The second cause for possible worry is inflation. While the wholesale price index (WPI) remains subdued, the consumer price index (CPI) has risen above 5.5 per cent. Food inflation is a particular concern. A good monsoon though should moderate the CPI. It is likely that this year’s southwest monsoon will extend well into October as the EI Nino factor fades by July and the La Nina phenomenon emerges around September. La Nina has appeared around 23 times in the past 125 years — roughly once every five years. It brings copious rain just as El Nino causes dry spells. Both American and Australian observatories have forecast a 96 per cent probability of La Nina by this September, pointing to an extended and bountiful monsoon.

A third reason to worry is a deepening global slowdown spurred by problems in China. The World Bank has cut its global GDP growth forecast from 2.9 per cent to 2.4 per cent and projects Indian economic growth in 2016-17 at 7.6 per cent. That though could be overly pessimistic.

Meanwhile, the stock and currency markets await news of Reserve Bank of India (RBI) governor Raghuram Rajan’s plans after his term ends on September 4. The debate is largely academic. On Rajan’s watch the rupee has depreciated gently against the dollar from Rs 58 to Rs 67 (15.5 per cent over three years). Other Asian currencies (except China’s yuan) have fallen more dramatically.

But Rajan’s record on bank NPAs is mixed. In a column in The Economic Times, Mythili Bhusnurmath assessed his tenure well: “The reality is that Rajan, like any mortal, has had his share of successes and failures. His biggest success has been on the inflation front, partly aided by the collapse in oil prices. His biggest failure has been on the banking front. The governor’s crackdown on large corporate defaulters has won him kudos and captured the public imagination. But like an oncologist, whose pursuit of rogue cancer cells (read: wilful defaulters) leads him to administer an aggressive dose of chemo that results in the destruction of both rogue and healthy cells (read: all defaulters, wilful or otherwise) and, tragically, leads to the death of his patient, the governor’s failure to think through the logical consequences of his actions, coupled with unrealistic timelines for clean-up of bank balance sheets, has knocked the bottom out of bank lending. Today, banks are either unwilling or unable to lend. And with no alternative source of funds in sight, the economy is severely crippled.”

Rajan has been part of India’s financial system since 2007. He served as honorary economic advisor to then Prime Minister Manmohan Singh from November 2008 and was appointed chief economic advisor to the Ministry of Finance in August 2012. In between he chaired the Indian government’s committee on financial sector reforms in 2007-2008. Rajan has therefore functioned as an integral component of India’s economic management for nearly a decade. His departure or continuation as RBI governor will have limited impact on the economy and the rupee.

A bigger priority for the government should be to implement a range of tax and labour reforms. As figures recently released by the income-tax department have shown, far too many resources are expended on taxing assessees with taxable income below Rs 5 lakh. Reforming the way India’s tax policy is managed will yield significant future dividends. So will labour reforms despite strong recent opposition from sangh parivar affiliated trade unions.

Meanwhile, as the southwest monsoon spreads its bounty across India, the PM and his cabinet need to ensure they extract every drop of advantage for India’s economy, which is poised on the cusp of a new orbit of growth.