Most irritants continue to stay as hurdles
India continue to be bothered by issues related to policy initiatives and execution bottlenecks. UPA lead by the Congress Party was booted out in May 2014 on issues around policy paralysis, regulatory irritants, administrative & execution bottlenecks, and all leading to corrupt practices, under-capacity productivity and poor efficiency. This triggered combination of anti-Congress and pro-NaMo wave to give BJP a single party majority in the Lok Sabha in May 2014. The hope and optimism did turn into euphoria taking comfort from the able leadership of NaMo, who was expected to sell India Story abroad and to build strong and efficient teams in the Government to step up pace from ideation to execution phase for on-ground impact of economic, monetary and social benefits.
The issues impacting external stakeholders are around policies related to legal, taxation and inordinate delay & complexities involved from investment entry stage to repatriation of returns. NaMo has done a good job in taking the India story abroad to deep-pocket nations, who can bring debt & equity into India and also support the Make-in-India initiative to balance expansion of domestic productivity and emerge as supplier of goods to feed external demand and consumption. The agenda is great on paper and in the right direction. The external stakeholders - investors, lenders and manufacturers are now in wait-and-watch mode with keen attention on various pipeline policy initiatives and better clarity on execution capabilities. Rolling out "red carpet" through liberalisation (and expansion) of ownership limits across sectors is good to attract attention but not good to pull hard cash. India has to emerge as one of the best destination for ease of doing business with no complex issues around entry and exit barriers.
Financial reforms key to build domestic capacity and attract foreign liquidity
The domestic financial system looks great from outside, but saddled with lot of inefficiencies around capital and NPAs in systemic important public and private sector banks, and fringe participation from Development Financial Institutions. The PSU banking system is in struggle for Capital, both for growth and strategic restructuring of its non-performing asset/loan book leading to revenue squeeze, low productivity and poor efficiency. The allocation of huge capital from exchequer to PSU banks is low in the absence of deep-pocket purse while dilution of public stake to private is not a sensible option at below par valuation. It is kind of between the devil and the deep sea. The solution is obvious to improve the efficiency of PSU banks and to build valuation before significant dilution from majority public stake to majority private for accumulation of huge premium to Capital funds, the way private sector banks have enlarged the capital base since 2004 through dilution of marginal stake for significant capital funds without dilution on the return on capital funds.
The actions now should revolve around NPA management. The huge NPA portfolio need to be shifted out from debt to cash or equity. The recent restructuring measures are only to shift the inevitable default risk from now to later date with the hope that Banks will build capabilities to absorb provisions. The role of the Government to participate in restructuring of the NPAs in core sectors around infrastructure and commodities is very critical to gain investor confidence on large Public Sector Banks. The stress loan book without adequate asset coverage have to be moved out from the Banks balance sheet to Government owned (or sponsored) finance (or investment) vehicles. The next agenda is the Bankruptcy Act which should remove the irritants for Banks and comfort of the borrowers. While the Banks are under pressure for accelerated provision on the NPAs, recovery process from the borrowers take decades. Against this huge time lag between provisions and actual recovery, Banks are expected to provide 50-75% of gross NPAs from the profit when most Banks are under revenue pressures from either the competition or the inefficiencies. The two measures of creation of National Infrastructure Fund and revised Bankruptcy Code are in the right direction. As always, execution risk remain valid if adequate cash is not allocated for the fund and stringent (and punitive) legal actions are not initiated on willful defaulters and/or impropriety use of borrowed funds. It is not proper to plough into tax payers money for the protection of large borrowers. The efficiency in which money is recovered from small borrowers should also be deployed for large borrowers.
Tax reforms critical for fiscal prudence and cost optimisation
India Taxation mechanism is inefficient both on the cost and revenue side. The inefficiencies on the revenue side is from tax evasion of many and understatement by most, while genuine payers not getting desired value for the contribution. The cost of collection of revenue is also inefficient. The multi-tier tax policy is also making things complex and leading to evasion. The Government has taken steps to plug revenue leakages and cost management which are seen as steps in the right direction to remove structural bottlenecks for long term sustainable benefits. The GST roll-out has been on "paper" for long which will remove the complexity in tax payment and collection. Will it be through (and done) now in the winter session of Parliament? Earlier the better to restore confidence on the Indian economy and financial markets.
Public resources critical to accelerate private investments and to attract offshore long term liquidity
Public investment for expansion of economic productivity is low. The exchequer is finding it difficult to meet both ends meet with most money spent on administration, subsidy consumption and social obligations around defence, security, legal, health care and education. Most developed economies revenues are from combination of taxes and profits from public sector enterprises. The capital/cash burn for running most PSU entities need to be stopped and turned into contributors to exchequer. This will lead to lower taxation leaving more monies for consumption. Genuine tax payers end up paying more than 50% by way of direct and indirect taxes which is inefficient. The only way is to bring in effectiveness in revenue collection, thrift in cost management, efficiency in PSU enterprises and to reduce spending on unproductive consumption items.
India can not aspire to become super power unless it emerges as best-fit building strengths on the economy, finance, defence, security and social standards. In all these parameters, India is below par/median amongst peers, and laggard with large gap with the leaders. The agenda has to be 3 phase - doing it right to be above par, doing it well to be best-in-class and diversify & build scale to be amongst the leaders. The Government now has the agenda to do things right removing the inefficiencies and bottlenecks switching from lower gears to high/top gear cruise mode; low-gear cruise (for extended time period) will lead to engine failure sooner than later! This is the caution and risk factor ahead on the political system. Can India political parties be kind enough to upgrade maturity for the good of the country and its people? As always, retain hope shifting the sentiments between optimism and pessimism. It is good that people have the patience to retain hope, waiting for the sight of light at the end of the tunnel! Will we see the light in 2016?
Moses Harding
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