A booming stock market should normally indicate a booming economy, but the link doesn’t always hold. In our case, the stock market shooting up by nearly 40 per cent since March this year is largely the result of $15 billion in foreign portfolio investment flowing into the market. This is an indication of the optimism felt by foreign investors at the promises by Narendra Modi to fix the economy, rather than a response to the state of the economy as it is.
Reserve Bank of India governor, Raghuram Rajan, did not reflect this optimism last week this week when he kept the repo rate (at which the RBI lends money to banks) at 8 per cent rather than lowering it, as business had hoped and the finance ministry had applied pressure on him to do so. This was despite inflation falling dramatically in October, normally a necessary precondition for lowering the repo. Mr Rajan’s reasoning was clear: “We want to make sure this process of inflation control is well underway. We are going to make sure this is for real, we don’t want to do a flip-flop.”
While the RBI isn’t yet sure the steep drop in inflation in recent months will last, there are other concerns as well. The most important is the budget deficit, lowering which is important to controlling inflation and government finances. Just a few days before the RBI policy review, it was announced that the government’s fiscal deficit for the first seven months of this financial year was an unprecedented 89.6 per cent of the yearly targeted deficit. In these seven months the fiscal deficit totalled Rs 4.76 lakh crore, compared to the target of Rs 5.31 lakh crore for the entire financial year, primarily because of a 37.7 per cent fall in tax revenue year-on-year.
Last year, the United Progressive Alliance government was lambasted in the press for its irresponsible profligacy when the fiscal deficit for the same period touched 84.4 per cent of the yearly target. This year the press is mostly silent on a much worse fiscal governance by Modi sarkar. The UPA government managed its fiscal deficit by postponing some of its budgetary expenses to the next year, a tactic the present regime may also use. The UPA was also helped by disinvestment in public sector enterprises, which led to revenue that capped the fisc.
This year with the stock market booming and the stocks of public sector companies also at a high, the government will hope to cover a greater proportion of the deficit by selling its stake in companies and get more than the Rs 58,000 budgeted for this. Disinvestment from just two companies — ONGC and Coal India — had budgeted Rs 42,000 crore, but will probably get more.
The government is also banking on the sharp drop in international oil prices continuing, leading to a drop in fuel subsidies, and reduction of the fertiliser subsidy. It is also cutting down on social sector initiatives like Mahatma Gandhi National Rural Employment Gurantee Act and, more disturbingly, ensuring that funds are no longer disbursed by local bodies like the panchayats but by the state governments, where knowledge of local conditions is poorer, but with greater scope for corruption. The significant corollary is that Plan investment in infrastructure and building social sector infrastructure like schools and hospitals will take a back seat. Instead, the regime will follow its Right-wing policy of giving private corporates more of a say in how social sector spending is funded and give them a greater say in how they are run.
Many other indicators point to a weakening economy. Industrial production has slumped in the second quarter. Export growth has slowed considerably, possibly on account of weak growth in the euro zone and a slowdown in China, which together account for about 30 per cent of India’s exports. While this is countered by the reduced expenditure on oil imports, growth in government revenue has been slow. Indirect tax collections in April-July this year have increased merely by under 4 per cent over the corresponding period of the previous year. It is unlikely that indirect tax collections will be 26 per cent higher than last year as budgeted, forcing the government to cut expenditure or show a higher fiscal deficit.
If the looming crisis in the fiscal deficit and how it is likely to be handled is a major concern, equally pressing is the parlous state of the banks. Bad loans and restructured loans (or so-called stressed assets) have reached the alarming proportion of over 10 per cent of all loans, doubling in the five years from 2008 to 2013. They now add up to more than the capitalisation of all banks and put the entire banking system at risk. This is particularly so because many of these bad loans have been given by banks under political pressure, and are therefore difficult to retrieve.
A case in point is Kingfisher Airlines (27 per cent of loans to the aviation sector are “stressed”). Political pressure was presumably also the reason behind the State Bank of India giving a billion-dollar loan to Adani Enterprises to buy a coal mine in Australia (where he went with Prime Minister Modi and who was also present when the loan was sanctioned) after five reputed international banks refused to pass the loan. The SBI already has stressed assets of over Rs 60,000 crore, making for over 20 per cent of the banking system’s stressed loans of Rs 270,000 crore.
— The writer is a Mumbai-based freelance journalist
