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At the beginning of this year most people will be hoping for better times ahead for the economy. All reports say that India will be better off than most countries in 2016 and unlike China is not facing a slowdown. According to the government, India is going to continue growing at a relatively high rate of 7.5 percent. Mr. Jaitley is pleased with last year’s economic performance and according to him, it is reflected in the rise in indirect revenue receipts. He is intending to focus on getting the GST Bill passed this year and to concentrate on enhancing the physical and social infrastructure of the country. He also added recently that he would go for more irrigation facilities.

Two documents of importance that have come out recently — the mid- term review by the Finance Ministry and the Reserve Bank of India’s Financial Stability Report — give an overall picture of the economy.  Though the macro-economic situation seems quite robust in both the reports, there is not much cause for cheer and the RBI report is even more circumspect. It specifically says: ‘there is no room for complacency’.

Now it is official that the corporate sector did not do well in 2015 and its profits after tax have been flat. The RBI has warned “The falling profit margins and decreasing debt repayment capabilities of the corporate sector add to (these) concerns.”

The manufacturing sector, though it grew at 10.7 per cent in October, has not been consistent in its performance. A high manufacturing growth is required in view of the fact that this sector provides jobs for the unskilled jobseekers.

The Index of industrial production (IIP) that includes manufacturing, mining and electricity however registered growth rates of 3.6 per cent and 4.6 per cent during the first (Q1) and second quarter(Q2) of 2015-16, respectively. In October the IIP reached 9.8 per cent but alas!—only temporarily. Core sector growth which includes 8 infrastructure sectors– like coal, crude oil, electricity, cement and steel, shrank in November by 1.3 per cent due to sharp decline in steel production. This will drag down IIP growth as the 8 core industries have a high weightage (38 per cent) in IIP.  Export growth has been falling over the last one year and weak global demand has been held responsible for the lackluster performance.

The agricultural sector has been stressed due to monsoon deficit for the second consecutive year. There was a shortfall of 2.05 million tons in the total production of pulses during 2014-15 which according to the mid- term review is the main reason why there was such a big spurt in dal prices causing much distress to all.

The RBI report has rightly pointed out the importance of agricultural insurance for the small and marginal farmers in view of the fact that there have been frequent episodes of weather related calamities in the farming sector which has had a severe impact on the livelihood of farmers. It hasn’t however mentioned the number of farmers’ suicide in 2015.

In the service sector there has been some disappointment. Though its rate of growth was in double digits (10.2 per cent) its performance on the export front was weak.

The main drivers of growth have been private consumption demand and public expenditure. Private investment has been slack and did not pick up. Hence the main aim of economic policy in 2016 ought to give a new thrust to private investment and boost exports.

Encouraging private investment is not going to be easy because it will depend on demand and last year rural demand was weak. It will also depend on another interest rate cut in the next monetary policy review which in turn will depend on the inflationary trends. The recent rise in the Consumer Price index or the retail price index was due to the shooting up of dal prices. It will have an adverse effect on the willingness of RBI to cut rates further.

The government is also concentrating on ease of doing business index so that it is easier for both domestic and foreign businesses to be able to start business and exit when they want. Already India has climbed up a few notches but its rank is still 130^th. A faster rate of infrastructure building is needed to bring India’s rank up a few more notches.

Both FDI and FIIs were an important source of capital in 2015. The government claimed that FDI rose by 40 per cent in 2015 whereas others reported an increase by 27 per cent. There were large inflows of FIIs but they also withdrew from the Indian market in droves when the US interest rate hike was announced by the Federal Reserve.

One area which continues to be problematic is the banking sector. Without banking reforms, business in India cannot grow fast. In the Financial Stability Report, it has been clearly pointed out that some of the large borrowers continued to be the biggest problems for banks’ balance sheet. The Non Performing Assets (NPAs) especially of the Public Sector Banks (PSBs) have been soaring to a dangerous level of 6.2 percent (September 2015). The big borrowers’ contribution to total bad loans rose to 87 per cent from 78.2 per cent a year earlier which is a major concern to lending institutions and other stakeholders, according to the RBI.

The PSBs were worst hit with gross NPAs among large borrowers showing a significant increase and their borrowings rose to 8.1 percent of PSBs’ total advances in September 2015 from 6.1 per cent in March 2014.The share of top 100 large borrowers in gross NPAs of all banks increased sharply to 3.1 per cent in September from 0.7 percent in March. We however still do not know who these big borrowers are!

It has led to lower asset quality of banks and PSBs today face worsening asset quality and sluggish profitability that show risks to banking stability in the past 6 months. Stress in PSBs is not just due to NPAs alone. They have paid Rs 20,000 crore as dividends in the last four years to the government and other stake holders!

Thus if Mr. Jaitley focuses on infrastructure, exports, private investment, banking and agriculture, there is hope for the economy this year!

Jayshree Sengupta
13 January 2016

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