Why Moody’s views should be a wake-up call for Modi government

The global ratings agency 'Inside India' report identifies slow reforms as the biggest threat to India’s macroeconomic story.

 |  3-minute read |   01-07-2015
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Global ratings agency Moody’s on Tuesday expressed its disappointment with the sluggish pace of reforms of the Modi government. It identified slow reforms as the biggest threat to India’s macroeconomic story. Without discounting the fact that the government has initiated reforms in some sectors, such as insurance, defence and labour, Moody’s views should set it thinking on the work that it is yet to take up. Here are some key steps it could take to speed up things on the ground.

1. Recapitalise banking sector by infusing more capital into public sector banks. The Indian state-owned banking sector is thoroughly stressed, with banks straddled with bad loans to the tune of Rs 2.60 lakh crore as on December, 2014. As banks make higher provisioning for their bad loans, financial infusion becomes necessary. The government has indicated that it will inject $1.8 billion into the banking sector this fiscal, over an above the $1.2 billion already promised in the budget, and that’s a positive sign. But more needs to be done if they are to further lend to new businesses and improve profitability.

2. Move fast on privatising loss-making government-owned enterprises: It has been estimated that 79 state-run companies had an accumulated loss of Rs 55,656 crore in 2012-13. Among these are Air India, Hindustan Cables, Hindustan Fertiliser Corporation and Hindustan Photo Films. Of these, Air India alone posted a net loss of around Rs 5,000 crore in 2013-14, and is straddled with unviable routes, a large number of unproductive staff and bears the brunt of government interference in its operations, making it one of the prime candidates for privatisation. But the government is yet to show any decisive action on this front.

3. The government has tom-tommed the 8.4 per cent increase in power generation in the past one year, but the country needs to quickly implement the proposed reforms in the power sector if the momentum is to be maintained. The plant load factor in power has touched a 15-year low of 65 per cent, although this should improve once the task of ensuring coal linkages for all projects is complete. But the real region to improve is the distribution side – pulling state electricity boards (SEBs) out of their mammoth losses. SEBs made losses of Rs 2.5 lakh crore in 2012, and in the year 2013-14, the Rajasthan SEB alone made a loss of Rs 10,643 crore. This has set off alarm bells in the banking sector, where banks have Rs 53,000 crore exposure to seven SEBs.

Turning them around, and preventing power losses are key to making success of reforms in this sector.

Added to these, the government should take steps to reassure investors that they are serious on bring in investment, by a creating friendly tax environment, undertaking labour reforms, placing a firm thrust on value-added manufacturing and focussing on generating the necessary skilled workforce to do so. These should go a long way in addressing some of the concerns of rating agencies and global investors who are watching India’s policy measures with keen interest.

Writer

MG Arun MG Arun @mgarun1

The writer is Deputy Editor, India Today.

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