It will be a tightrope walk for finance minister

It will be a tightrope walk for finance minister

FPJ BureauUpdated: Tuesday, July 02, 2019, 11:05 PM IST
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Nirmala Sitharaman - Finance Minister of India |

Difficult fiscal situation gave little head room to the new Finance Minister Nirmala Sitharaman to provide much needed stimulus in her maiden budget July 5 to pump prime the slowing economy. Sitharaman like most finance ministers is in an unenvious position as she will have to resort to a tight rope walk to kick start the economy at a time domestic demand is low, macro-economic fundamentals not so strong, global economy slowing, exports slowing down besides widespread farm distress and difficult monsoon year.

There is no quick fix solution to the economy, which is widely expected to clock below 7 per cent growth for the second consecutive year this financial year. Ideally, the best option available for Sitharaman is not to push hasty big ticket reforms and instead carry on with the policies initiated in the interim budget in February and attempt major reforms in the next budget after bringing about macro-economic stability this year. Reforms will have to be gradual and non-disruptive as was done during 1991.

One wrong move — demonetisation in November 2016, has resulted in rural distress and joblessness. Instead of any hasty reforms what Sitharaman should attempt is to remonetise the economy so that consumption demand especially in rural area picks up.

The present economic situation is not as bad as 1991, renowned economist Pronab Sen said adding “I feel it is still a hangover of demonetisation. Farm and informal sector were badly affected. The point is consumption comes from lower income and rural group and that has not started.”

A small step by the government to lift the cash limit of Rs 2 lakh imposed after demonetisation could go a long way in remonetising farm traders. This can be done even before the budget.

The Jan Dhan Yojana has worked wonders for improving savings of the poor and for direct benefit transfers but failed to help farmers carry out normal transactions for buying and selling of their produce, which is still on cash. “This is crux of the farm distress problem and certainly not a demand-supply issue,” Sen asserted.

It is a Catch 22 situation as a result as rural jobs are linked to this issue, Sen said. Nearly 70 per cent of the population still live in rural India. 41 per cent of the Indian population depended solely on agriculture. This meant nearly 70 per cent of rural population depended on farming. So, the cash crunch becomes a major issue in running rural economy as it distorts the entire farm market operation. MSME has been badly hit because of informal lending has dried up. The problem has been accentuated because of NBFCs, which are in doldrums.

Large NPA in banks are yet another issue that needed immediate attention. Senior IAS officer and Additional Secretary V Srinivas quotes the IMF to say that the Indian financial sector is facing considerable challenges of high non-performing assets. The stress tests showed a group of public sector banks highly vulnerable to further declines in asset quality and higher provisioning needs. This has to be another priority area for Nirmala Sitaraman, particularly recapitalisation of banks. Srinivas was former advisor to India’s executive director in IMF.

To enable banks to raise long-term deposits to lend to infrastructure, Government should allow banks to raise tax free bonds from public as developmental financial institutions were allowed to do so earlier. This will ensure banks do not have asset-liability mismatch. At present, banks raise deposits short term, for 3-5 years and lend long term for infrastructure projects resulting in the mismatch. Banking law might have to be amended for this purpose.

To deal with bad debts, Sen said banks have no option but to take huge haircuts. But Insolvency and Bankruptcy Code will ensure frauds like Nirav Modi’s do not happen in the future. “The long and short of it, now sense has been put into the system,” Sen said.

Fiscal situation is not that good. The budget will not be able to take any more sops. Sensible thing would be to hold on and announce them after well-thought out structural reforms are prepared. There is certainly not enough time to prepare them before the budget. Fiscal situation can be tackled only gradually, Sen said agreeing with economist and official of NIPFP N R Bhanumurty. So, the government should not be overzealous in meeting fiscal deficit target.

Nonsoon prediction indicates it will be below normal and sowing is likely to be delayed so it does not augur well for agriculture. There is continuous slowdown in consumption in rural as well as urban demand and credit off-take is low indicating revival of industrial activity is not all that encouraging.

Bhanumurty of NIFPP said the way forward is to push consumption demand, one by relaxing fiscal deficit target and spending more on rural development particularly in MNREGA programme to put money in hands of rural poor.

To be fair to Modi government, it had done quite a lot for rural development by way rural roads, housing but more needed to be done to revive MSMEs and rural industries apart from tackling cash crunch among farmers.

Revival of stalled projects especially those that can be completed with little more expenditure should be identified and pursued vigorously step up growth, he said adding remonetisation of the economy, necessary to push growth ”will take a little bit of time,” he said.

Nirmala Sitaraman has inherited a “weak and distress economy” but he felt that she has ability to convert this adverse situation into opportunity. The Modi government 2.0 has shown tilt towards real economic issues, he said adding setting up of cabinet committees on jobs and skill development and another on economy and investment are a welcome development.

Sitharaman will do well not to resort to any populism but instead concentrate on hard issues that are rocking the boat so as to bring about economic stability and push major reforms next year to move on to high growth path.

-K R Sudhaman

The writer is a freelance journalist.Views are personal.

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