Summing up the country’s growth profile on the completion of one year of Prime Minister Narendra Modi’s government in power, the government’s chief economic adviser, Arvind Subramanian, held out a picture of hope, predicated however, on investment coming in from the private sector and issues like the Goods and Services Tax. He made a persuasive case for cutting interest rates in the RBI’s credit policy, due June 2, as he says this is necessary to spur growth.
Interest rates is certainly an issue considering that India’s export competitors are countries with low interest and currency rates. Most have gone in for quantitative easing programmes which, simply put, is an easy money policy. Mr Subramanian hopes that the rupee does not get too strong as neighbours, and others, like Japan, are trying to keep their currency down.
India’s exports have been falling and so is industrial production. Inflation, both wholesale and retail, has been decreasing to RBI’s comfort level. However, besides inflation, the RBI also looks at the quality of the fiscal deficit target achieved by the government and, so far, this has been by cutting capital expenditure and not by increasing tax collection. Mr Subramanian says he expects tax collection to go up and cites this as one of the factors to bolster his case for a rate cut. It is now in the hands of RBI governor Raghuram Rajan, who has been thrown broad hints even by Union finance minister Arun Jaitley. Interest rates, however, is not the only issue making exports uncompetitive or hampering domestic investment.
The point is that Indian companies are highly leveraged, particularly in the infrastructure industry. In the power sector, for instance, Rs 40,000 crore has been locked up in power plants functioning below optimal capacity, and another Rs 60,000 crore is under threat if the gas-based plants are not revived. It is regrettable that though a year has elapsed, the Modi government still says that a pool management committee for the import of gas for gas-based power stations will be formed in a month. The power ministry knew about this problem from day one of this government. So why did it take so long?
Mr Subramanian has red-flagged the one per cent tax that the manufacturing states are going to charge on goods passing through their states. This means the owners have to pay multiple taxes before their goods reach their destinations. This will hurt the Make in India programme, which is yet to get off the ground. The refreshing factor in Mr Subramanian’s report card is that he recognises that it is now time for implementation. One hopes this takes off.
