Five point plan to jumpstart economy by Modi Government
Dated 19th September, 2014
In a recent four-day ‘macro due diligence’ trip, economists at Morgan Stanley met with key policymakers, business leaders, credit ratings agencies and independent consultants to try and understand the Narendra Modi government’s agenda on how to reinvigorate the Indian economy and the progress its policies had made.
In a report, the firm says the government is trying to fix productivity growth, which resulted from poor policy choices of the past such as: maintaining high fiscal deficit, pushing for rural wage growth, maintaining negative real interest rates and deterioration in the business environment.
According to the firm, there are five high priority areas for the incumbent government with respect to its economic policy.
-- Fast-tracking investment approval process: Previously, a weak political under the erstwhile coalition government and emergence of corruption scandals had brought decision making to a halt. To kick start projects stuck under government approvals, the government will focus on the Project Monitoring Group, whose aim is to facilitate the approval process for projects above Rs 1,000 crore. This group has set up a website, coordinates with central and state governments to help smoothen implementation and interacts with the prime minister’s office in case of issues. Several projects such as those in the power or roads sector that have been stalled because they turned out to be unviable will be renegotiated with all parties requiring to take some bit of haircut. To facilitate more Greenfield projects, models will be reworked
-- in some cases moved from the PPP model to EPC model
–- to make it more attractive for the private sector. The prime minister will also seek to get in more foreign funding, such as that from his Japan trip.
-- Improving business environment leading to lower stressed assets: One of the factors that has held back investment in the economy has been weak corporate balance sheets and asset quality in the banking system. Our conversations with banks and credit rating agencies indicate that corporate balance sheets remain weak and asset quality is still a concern. However, there are early signs of a reversal in credit quality thanks to the improvement in macro stability and economic growth outlook. Recent changes in the RBI’s regulations have helped banks’ efforts to make progress on asset quality.
-- Tweaking government expenditure and implementing GST: The Expenditure Management Commission, which has been set up under Bimal Jalan, is expected to give an interim report before the FY2016 budget (in February 2015). Based on its recommendations, the government may look at controlling subsidy outflows
–- especially related to fertilizer and fuel (subsidy on sale of cooking gas and kerosene).
-- The renewed focus of the government on Aadhar and financial inclusion drive will help to drive the use of the direct benefit transfer scheme for transfer of subsidy payments. Currently, 67.3 crore people have a unique identification number and the UIDAI seeks to extend this to 100 crore people by next year. Government officials expect the DBT scheme to start for LPG (cooking gas) and kerosene payments from end of FY15. Policy makers indicated that government is keen to expedite the process for rollout of the GST
–- which will be the most comprehensive taxation reform in the country. Government officials indicated that full-scale implementation of GST by April 2016 seemed a realistic timeframe
Policymakers recognized the need to maintain moderate growth in rural wages and the need to link the national rural employment guarantee scheme to creation of durable assets with linkages to rural or agri-economy. The Ministry of Rural Development has allowed states to change the wages to material ratio from 60:40 to 51:49, which will help the governments to take up more asset-creating work under the National Rural Employment Guarantee Scheme (NREGS).
Government officials remained cognizant of the urgency to control inflation and were optimistic that the deceleration in inflation over the last few months should be sustained. The government officials indicated that recent steps to reduce the fiscal deficit and efforts to improve supply-side response (such as revival of stuck projects) should help to lower non-food inflation. Food inflation pressures are something that the government officials are tracking very closely. Currently, with the better management of food grain stock (open market sales) and lower hike in minimum support prices, encouraging states to delist vegetables from the APMC Act, officials remained optimistic that food inflation should be largely contained.