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What can revive India’s GDP growth — consumption and investment

Sunil Jain
Union Budget 2019 India,Budget 2019 India

Budget 2019: Though government economists have done a comprehensive job of demolishing ex-CEA Arvind Subramanian s argument that India has overestimated its GDP growth by as much as 2.5 percentage points, what is worrying is that while average growth for FY19 may be a little over 6.8%, that for the January to March quarter (Q4) has fallen to a mere 5.8% versus 8.1% a year ago. It is this growth level that India has to pull itself up from, and the prospects aren t good, which is why some forecasts are looking at an FY20 growth that is lower than that in the previous year.

While growth in private consumption levels have remained at the same 7% level in both Q1 and Q4 of FY19 (they fell from 12% to 10% in terms of current prices), investment growth has collapsed from 13% to 4% (and from 17% to 7% in current prices). In such a scenario, the only way GDP growth can pick up is if investment levels or government consumption rises dramatically it grew from 7% in Q1 to 13% in Q4 in constant prices, and from 12% to 16% in current prices but with the government quite cash-strapped, that isn t a possibility; in any case, since government expenditure is just 9-10% of GDP, there is just that much it can achieve. Indeed, given the NBFC crisis, and its impact on credit growth, the downside pressure on GDP growth is even higher.

Some argue that, along with a sharp cut in corporate tax rates India s are amongst the highest in the world a sharper cut in repo rates by RBI will do a lot to stimulate investment; so, while finance minister Nirmala Sitharaman can do the first in the budget, RBI Governor Shaktikanta Das will do the rest in the next credit policy. Both moves will help, but how much is not clear. Even if RBI cuts repo, this may not translate into lower rates for a variety of reasons, including the fact that the government-mandated savings rates on small deposits puts a floor to bank-deposit rates and, in turn, lending rates. And tax cuts can t help if the investment climate is poor.

If an investor in a power plant can t get enough coal to run it because the public sector monopolist Coal India isn t producing enough, or if a bankrupt state electricity board can t either buy the power or pay for it on time, how will a lower interest rate or a tax cut help?

Though these are not strictly budget issues, traditionally budgets are used to make larger policy announcements that will be followed through during the year; so, apart from the actual numbers on deficits etc, Sitharaman s budget will be watched for whether the government uses it to shed its anti-industry image.

In the case of telecom, as this newspaper has catalogued regularly, the investment climate turned hostile even before RJio s entry with its very low tariffs; while the government used to charge industry a revenue-share at the time it gave out spectrum almost free, it carried on with this even after it started charging an arm and a leg for the spectrum. It was relatively easy for prime minister Narendra Modi to fix this, but Congress president Rahul Gandhi s suit-boot-ki-sarkaar jibe seemed to have given him cold feet.

In the oil and gas sector, despite Modi s professed aim to lower import dependence, oilcos do not get the market price for all their output. In the case of natural gas, only that produced from new fields will get the market price; but if firms don t make higher profits on their existing production, how will they invest to find new gas? And while firms are free to get market prices in the case of oil, if the government specifies which buyers are to get how much oil, this ensures there is no real price discovery. Nothing exemplifies this anti-investor attitude better than the government s treatment of UK firm Cairn Energy which, within a few years, produced a fourth of India s oil output. It was slapped with a retrospective tax, its shares worth $1bn were confiscated and dividends etc worth $300-400mn were appropriated; indeed, when Cairn (by then sold to Vedanta) wanted an extension of its lease so that it could add to India s oil production the government agreed only if Cairn raised the revenue it would share by a whopping 10 percentage points (bit.ly/2OZUy2r).

In the case of minerals like coal and iron ore even without oil, they comprise 25% of India s imports, and 55% with oil hardly 10% of India s geology has been explored even though doubling this can create another 5 million jobs. Apart from unconscionable delays in getting environment clearances, as in the telecom sector, rapacious government levies are a big problem; as compared to 8-12% levels globally, Indian levies on most non-oil minerals work out to around 30% of top-line revenues. The government is focused on increasing the country s overall exports this can t be done if taxes and interest rates aren t slashed and rigid labour laws abolished but if imports of minerals fall due to higher local production, the forex impact is the same.

If investment levels have fallen dramatically due to poor government policy, so has FDI, from 1.9% of GDP in FY16 to 1.6% in FY19. If the government changes it policy on e-commerce after Walmart spent $16bn to buy Flipkart, for instance, it is difficult to see how foreign investors are going to remain enthused.

Certainly, PE funds and others will bring in money to take advantage of the bargains available at the NCLT, but greenfield investment requires a more predictable regime.

Much like in 1991, the budget will be watched for whether it unleashes a slew of reforms, the new industrial policy that President Ram Nath Kovind spoke of on Thursday. How sweeping the reforms will be depends on whether prime minister Modi thinks India is in a crisis. Given the state of the fisc, the falling investment levels and the rising joblessness, the crisis is apparent even if no one is mortgaging their gold.