Why poor growth will haunt Modi till 2019
Prime Minister Narendra Modi is believed to be the master of political timing. But his sense of timing seems to have taken a knock on the economic front. Over the last three years, despite political resolve and widespread support, a majority of his significant economic interventions - including the recent bank recapitalisation package - have proved to be ill-timed.
Bank recapitalisation will undoubtedly heal the bruised banking system and lead to revival eventually, but the BJP may have to contest its crucial electoral battles under the shadow of sluggish growth, jobs famine and investment drought because growth revival may take at least six to eight quarters.
Although the government has started biting the bullet to boost economic growth, two troubling transitions are happening at a time when PM Modi is staring at a tough electoral calendar.
Belated recapitalisation will bring delayed results
Banking bailouts are always controversial, especially, when offered against the bad debt mess created by a crony banking system. The recent Rs 2.1 lakh crore recapitalisation package (Rs 18,000 crore from budget, Rs 58,000 crore from the market - as the government dilutes its stake - and Rs 1.35 lakh through recapitalisation bonds issued by the government) for public sector banks (PSBs) is no exception.
However, the economics of the package is also dependent on the expectations of the industry. As per the estimates of the banking industry and CRISIL, PSU banks will have to take a substantial haircut (50-60 per cent) on stressed loans by the end of the current financial year. Factoring in the haircut, the total capital requirement for all PSU banks is being pegged at Rs 1.8 lakh crore. Consequently, the recapitalisation package is adequate for PSU banks' bad loan provisioning and also offers capital cushion to kick-start lending.
In the economy, difficulties (not desires) are nourished by delays. In 2014-15, when the Modi government was burdening the banks with populism of Jan Dhan and Mudra, they were crying for capital support. If the government would have come up with a recapitalisation package in 2015, banks would have recovered by now.
Although consumption demand and investment are still under stress, the bank recapitalisation plan augurs well for commercial lending to medium and small enterprises and improves the prospects of growth for industrial and services sector, eventually.
As far as consumer lending is concerned, demand for home finances is unlikely to be revived till the real estate sector adjusts to the introduction of the Real Estate (Regulation and Development) Act and the reformed bankruptcy law. However, banks may focus on auto and personal lending with growth uptick.
If everything goes well with an eight-quarter-long implementation process of the recapitalisation package, the banking industry will stay under transition for two years.
GST: Any time is not the good time
For economies like India, where private consumption is the turbocharger for growth, indirect tax reforms with high taxation bias are injurious to growth.
A reform measure such as the introduction of the Goods and Services Tax (GST) turned ruinous as it was implemented at a time the economy was experiencing a downturn. The Value Added Tax (VAT), the predecessor of GST was implemented amid economic growth (2005), which boosted government treasuries thanks to rising consumption.
GST is the most ill-timed reform India has ever seen. On the one hand, it was forced amid an investment drought. On the other, it came soon after the devastating demonetisation.
After the initial GST debacle, the government finally conceded to its flaws and retreated on the tax reforms for a complete overhaul. GST will go through tax rates re-fitments as well as changes in compliance and other vital procedures.
The revenue mandarins estimate at least a year-long transition. Consequently, the industry and trade investment decisions could remain on hold for longer than expected till the GST gets its desired acceptance.Indian economy encountered a simultaneous demand and supply drag. In the coming quarters, banking recapitalisation would gradually ease out supply side constraints. As far as demand recession is concerned, there is no instant trigger in sight to boost it. The impact of note ban is still lingering and the GST overhaul is expected to extend the demand famine for longer than expected.
As banking and GST transitions will take six to eight quarters, the headline GDP growth is likely to show initial signs of recovery only after the financial year 2019.
Interestingly, the graph presented in finance minister Arun Jaitley's presser on October 25 also came up with similar projections. Unlike the optimistic and quick bounce-back claim by Rajiv Kumar, chairman NITI Aayog's and "technical" reasoning of BJP president Amit Shah, the finance ministry estimates that gradual revival will start only after the 2018-19 fiscal year and recovery to 8 per cent growth rate (achieved in 2016) will be possible only by 2021-22.
The state of the economy has brought India's election-loaded politics to an interesting turning point. As revival from the slowdown and joblessness will take longer than expected, PM Modi will be forced to go for electoral campaigns without the artillery of economic growth. Now, the biggest question is not when economic revival will start, but how PM Modi will counter the dismal economic narrative going into the big 2019 battle.