By Vivek N. Joshi
In my experience, it takes three years to turnaround & to stabilize a business which has gone off-track, positioning it for sustainable growth using both Economic & Organization Design approaches. It is reasonable to assume that turning around a large & complex country like India could take as long. India has a federal structure in which some powers rest with the Central Government, some rest with the State (province) governments, and a number are on the concurrent list requiring broad-based consensus. A multipronged approach is thus needed. The status of various Economic & Legislative initiatives at the completion of two years of the current government led by Prime Minister Modi are summarized below.
1. Insurance Amendment encouraging FDI: Complete, and will help a very under-insured country.
2. Coal Mines: Complete (proceeds now go to States & the Centre). Coal production has increased by 32 million tons in 1 year, compared to the increase of 8 mln. tons earlier. Power plants are reporting excess coal now, instead of hand to mouth existence earlier. Coal imports have nearly stopped.
3. Mines & Mineral Development Regulation (Mines): Passed, being implemented
4. Aadhar Act (Targeted delivery of benefits on an IT-enabled platform): Passed. See below for details.
5. Bankruptcy Bill: Passed, after having to be diverted to select committees. Bankruptcy used to take 5 years earlier, may now take 1 year. Many who took advantage of the system earlier are now having to sell assets to repay public sector banks, and largest ever sale of assets is underway.
6. Goods & Services Tax: Still stuck. Hold-up in Rajya Sabha (RS - an upper house of parliament) due to baffling pre-condition by the opposition of adding tax rate in Constitution.
7. Land Reform: Stuck in select committee in RS. States will need to take initiative, facilitated by Centre. States like Tamil Nadu (TN), Andhra Pradesh (AP), Rajasthan(Raj) have taken some steps, Maharashtra i(Mah) is attempting. Coalition in Mah. may make it difficult.
8. Labour Reform: Significant central legislation not possible, partially due to the composition of RS. Union govt is playing a facilitating role, with AP, Gujarat, Madhya Pradesh(MP) & Raj passing significant reform legislation approved by the Centre. Some more states will also take advantage of this dispensation. Given that RS composition will change significantly only by 2018 and that elections will be in 2019 significant central reforms will be quite difficult.
9. Last two sessions of Lok Sabha (lower house of parliament) have been very productive in terms of legislations passed.
10. The bills passed exceed 100, only the key ones are summarized.
11. Hefty dividends are finally being taxed. As measures to control inequality take root, expect the “Picketty” effect to grow.
Conclusion: Notable progress achieved. A lot more needs to be done.
1. Fiscal Deficit: Sticking to a fiscal deficit target of 3.5% was a pleasant surprise. An easy way out was eschewed. Resounding thumbs up from Investors
2. Direct Benefit Transfer: This helps the poor. Use of Aadhar in several benefits was blocked by Supreme Court until end 2015. The Act above will help. Roll-out on LPG done. Trial roll out on Kerosene in progress. Fertilizer & Food subsidy roll-out in progress. Part of the roll-out is under the control of states. More than Rs. 200,000 mn saved due to DBT of LPG.
3. Auto fuel subsidies: Reform largely complete. About 10 million citizens have voluntarily given up the subsidized supply of LPG. The point above will help. The key test will be when the crude oil price goes up.
4. Power subsidies: State government's subject. See below for reform in distribution
5. GST: Structure for implementation ready by Oct 2016. See above for legislative issues.
Conclusion: Significant progress. Deficit reduction needs to be continued.
1. Financial inclusion: Notable progress. 220 mn. new DBT enabled bank accounts with now more than Rs. 350,000 mn opened under Jan-Dhan yojana. More than 10 mln. Insurance policies issued connected with these. Hopefully, the poor will utilize them fully. Crop insurance scheme made much more extensive and efficient.
2. Indradhanush program which will substantially improve PSBs and banking, in general, has begun to make an impact.
3. Bank board bureau being established, headed by a clean bureaucrat.
4. Public Sector Banks were suffering from the impact of economic slowdown earlier, and political interference. This has been curtailed significantly. Restructuring in progress. The 7th largest economy in the world does not have even the 50th largest bank. Too many small banks need to merge into an entity like SBI. Trade unions are resisting, and hopefully, it can be managed.
5. Bank Non-performing assets: Between 2006-2012, lending by banks had increased by 600%, several of which were poorly targeted. 88% of the stressed assets are big corporates who borrowed heavily in this period. To rub salt into a wound, the overhang of these NPAs (~12% of total lending, almost 7-8% of GDP) was constraining banks from extending legitimate loans due to balance sheet constraints. The clean-up has progressed quite a bit. Bank lending has begun to pick-up now.
Conclusion: Good progress. Short-term clean-up needed. Long-term consolidation of banks needed.
1. India needs about $800 billion by 2020, of which at least $250 bln has to come through FDI. Several sectors have been opened up or opened up further.
2. Inward FDI has crossed a record $60 bln, more than 100% more than earlier. #1 as per UNCTAD (some conflicting data here, whether it is China or India).
3. Even more significant, greenfield FDI announced ~ $63 bln last year, which is #1 in the world, more than China & USA. This is about 8.5% of global share, nearly 225% more than in 2014.
4. The States of Maharastra, Delhi, Karnataka, Gujarat, Tamil Nadu got about 80% of this FDI. Several state governments need to compete better.
5. Outside of USA, India is becoming the largest destination for R&D related FDI, ahead of China.
6. Capacity utilization has been low ~70%), several corporates have been stressed from binges earlier, and banks have been reluctant to lend. There is a gradual improvement now, but significant change will come by next financial year.
Conclusion: Several steps in the right direction. Outlook is positive
1. Road construction has increased to 16.5 km/day from 8.5 km/day earlier. Annual projects award have increased by ~300%. Several project implementers were in serious financial difficulties, many due to genuine reasons. Some creative thinking has helped (plug & play model for example) Issues seem to be sorted out and implementation rate will pick up even more.
2. In railways, new tracks rate has stepped up to 7 km/day, almost 80% higher than earlier. Annual investment proposed is double of earlier. 400 major railway stations being modernized. 2800 km of lines for eastern & western freight corridors, and almost 1500 km of new lines. Noteworthy that resources are not frittered away in populism, but in creating capacity.
3. 93 million tons of port capacity added, a record. Efficiency increased with operating profit of major ports up by almost 50%. 106 waterways to be national waterways (only 5 in last 30 years). Integrated Sagarmala project started (ports, roads, railways, waterways, coastal zones, trans-shipment). Should we have a Ministry of Logistics?
4. 6800 village electrified, compared to 2500 per year earlier. Target is to electrify the remaining 12000 villages by 2018. Will we have 100% electrification in India finally? Quality & availability of power has improved.
5. UDAY scheme for power distribution companies. This could be a game changer. Since SEBs are under State governments, their co-operation is critical. Creative thinking in UDAY may make it feasible. 23 states have signed up for various stages, implementation has started. A start made to large scale underground lines, IT enabled metering. Will help in reducing losses. Transmission lines expansion up by 30% annually.
6. Renewable energy: Ambitious plans to have 175 GW by 2019, with 100 GW of solar. Installed solar was less than 4 GW in 2014. Projects of 20GW have started. Roof-top solar is the next major thrust. 10 million LED lamps have replaced earlier CFL. The International Solar Alliance headed by India announced in COP21, Paris. Investors & environmentalists are both thrilled. This is also a major boost to energy security.
7. The hydrocarbon exploration was being held up due to an existence and also fear of crony capitalism. New policy is rational, and will help boost exploration of assets in a country desperately short of domestic crude oil.
8. Additional spectrum released. Auction of spectrum now brings revenue to the govt, instead of benefiting crony capitalists.
Conclusion: Emphasis on capacity building is noteworthy. This is an attempt to address one of the weakest parts of the India story.
1. No surprises that Rs. 300,000 have not come into the bank account of every citizen, which was an election time gimmick. However, a number of structural & long-term actions have been taken.
2. The DTAA with Mauritius has been modified to control round-tripping, after months of tough negotiations. Singapore will also change its DTAA.
3. Cypress was declared a non-cooperative jurisdiction finally, suspending the DTAA. Cypress is now falling in line and modifying their DTAA.
4. The PN route has finally come seen some action, with disclosure of beneficiaries becoming mandatory. Vested interests have prevented this for years. Moves to control this result in stock market upheavals. Short-term impact on stock market expected, but the firmness of the govt may finally see some control emerging. BEPS has helped.
5. Disclosure limits on high-value transactions are being steadily reduced.
6. WB estimates that from 2005 to 2012, the outflow of black money from India was about $58 bln per year. There has not been updating recently.
7. In 2013 the then FM had attempted an excise duty on jewelry, which had to be rolled back when the jewelers met & pleaded with the high command. A similar excise duty has been imposed now, with the govt remaining firm.
8. For the first time in 40 years, India moved above China in the corruption index of Transparency International. Rank has further improved in 2015. China has also improved, but still trails India.
9. Businessmen no longer need to crowd the ministries and have been discouraged from doing so.
10. The focus now needs to be done on state & local governments, where actions trail those at central levels.
Conclusion: Structural changes are in progress, which will yield long-term returns.
1. Both Fiscal Deficit (Central) & Current Account Deficit are under control, though India continues to have a higher fiscal deficit among major economies. Continuing efforts needed. Crude oil prices have been of a lot of help in the control, along with prudent policies.
2. World trade has shown negative growth. With the very slow growth in EU, slow growth in USA and turmoil in China, exports are unlikely to grow for this financial year.
3. Overall exports have declined by ~17%. It is noteworthy that non-oil, non-jewellery exports have declined by about 4-5 %. With commodity (raw material) prices down, it follows that export prices will decline too. As of Dec 2015, value added (exports-imports) was flat. India has had negative net exports for decades. This continues to be an area of concern. Rupee continues to be quite overvalued (RBI REER~11%), which hurts exports somewhat but helps control inflation. The actions of the Federal Reserve will have an impact towards late 2016, but impact on India will be much less than other EMs.
4. The GVA part of the GDP (new series) is reported to be about 7.2%. Exports enter into GVA as net exports, which have been negative for decades. The new series is a more broad-based method, more in tune with developed country standards. Part of it is based on “enterprise method” and not “establishment method”, with data from a much broader source beyond than IIP or listed companies. While it is early to comment definitively, WB, ADB and IMF are all backing up the reported growth.
5. It is noteworthy that measurement of GDP is based on “nominal” GDP, which is then corrected for inflation (see below). With commodity prices low, many corporates have found it difficult to hike prices (like in developed economies). However, GDP measures value addition, and this is measured somewhat differently in economics than the net profit in finance, which is reported in stock markets. Several corporates (ex-Infra, metals) have reported reasonable growth in gross profits & operating profits. Two successive droughts have presented a challenge, with negative agricultural growth rates.
6. Inflation has been negative (disinflation) due to a negative WPI, leading to real GDP growth being higher than nominal growth. This has been a cause for concern. WPI seems to be finally positive, partly due to base effects. The wide gap between CPI & WPI has been a challenge. Core inflation has also been low. CPI is driven up by some food items, of which pulses has been notable. India consumes ~21 mln. Tons of pulses, while producing ~19 mn tons. Being the largest consumer of “pulses” in the world, import prices follow demand here. It takes 2 years to rotate crops. FCI buffers have focussed on wheat & rice. A buffer has been created to manage pulses now. Again, crude oil prices have been very helpful.
7. A Significant part of the value from “farm to fork” is captured by middlemen. The govt has modified the APMC act at the central level. APMC is a state subject, however, and except Raj & MP none of the large states have been fast enough. Mah. is struggling in this. Apart from disproportionate political and agitations clout, the middlemen provide livelihood to tens of millions of people, who may not have access to other jobs readily. The govt has recently started a digital mandi (whole-sale markets) initiative, where a farmer can theoretically access all mandis, thus chipping away the entrenched inefficiency. This is an example of why reforms and change in India end up being gradual.
8. The RBI targets a band of CPI of 4-6%, and is well within that now. CPI has bumped up recently, but is expected to remain within the band, and decline marginally to 5% by year end. The fiscal deficit control has allowed monetary policy to help, by slowly (& very cautiously) decreasing interest rates (Repo rate), with some reduction of SLR & CRR.
9. India had “jobless growth” from 2005 to 2012. Job creation has moved up to about 400,000 jobs annually, which is still far below the required 11 mn. annually. Job creation will require industrialization, which is hampered by lack of private investment, land & labour reform delays and rate of implantation. The pace of progress will need to be stepped up.
10. WB reports that India moved up by between 4 and 12 ranks in ease of doing business early in 2015. This reverses years of decline, but India was still at about 122. The report mentions that several initiatives had not been recorded in the report. It is reasonable to expect significantly more upward movement in ranking in the next two reports. The govt is ambitiously targeting coming within first 50 by 2018, which is quite optimistic.
Conclusion: Steady clip. Outlook is positive, it is a continuous process of improvement.
2016 will be a turbulent year for the world economy. India will continue to be the fastest growing large economy, and already is the 3rd largest contributor to global growth in absolute terms. From late 2016 onwards, private investment is expected to look up, and with the exit of El Nino & promise of La Nina, agriculture will also fare better. Several of the steps taken will take root, efficiency will continue to increase, govt expenditure will be high, exports will be down, deficits and rupee will be under control, and growth will steadily increase. Adverse impacts will come from global headwinds. India is an evolutionary society with an intrinsic internal equilibrium and is not a revolutionary society. Change, therefore, will need to be evolutionary and inclusive, and hence will be on a firm platform.
About the Author:
Vivek Joshi is an Advisor to A-Joshi Strategy Consultants Pvt Ltd based in Mumbai, at www.expertstrat.com. He has international experience in various sectors, and is an expert in Strategy, Innovation, Venture Capital, Knowledge Management and General Management. Vivek is an invited speaker and contributes to knowledge in Strategy, Venture Capital, Economics, Challenges of the 21st Century and Geopolitics.