When the government was sworn into office in May, it was unanimously heralded as the big game-changer for India. There is a palpable change in sentiment and expectations continue to remain high.
The first assessment of the government was on the completion of 30 days. Approval ratings remained high, barring the debacle over the increase in passenger railway fares. Stagnant passenger rail fares had led to a bleeding of the railway’s finances by Rs. 30,000 crore. While this was a legacy problem, the new government quickly learnt that it cannot afford such lapses, especially when it adversely impacts the common man. Small doses of measured increases are more palatable.
Within 45 days the government presented a budget that was neither overly ambitious, populist, nor harsh on its taxpayers. The real surprise was Union finance minister Arun Jaitley’s resolve to adhere to the fiscal deficit target of 4.1% of GDP for the financial year 2015 set by his predecessor. He skilfully killed two birds with one stone. He silenced his potential detractors and conveyed the right message of fiscal prudence. That was indeed a masterstroke.
Budgets are notorious for the ‘devil being in the detail’. To the credit of the minister, this one has not been so. The length of the budget speech may have been arduous, but it was completely transparent. There were no surprises tucked away in the fine print.
So far, Jaitley has demonstrated competence and the markets appear to reflect the confidence they have in him. His task is daunting, not only due to the challenges of the Indian economy, but also because of the many hats he is currently wearing — being in charge of the finance ministry, defence, corporate affairs and most importantly, being among the most trusted lieutenants of the prime minister.
There is once again going to be speculation on the government’s performance as it completes 100 days in early September. Perhaps this short-term intense scrutiny needs to stop. The government needs time and some leeway before any meaningful assessment of its performance is made. There is merit in the way the government has conducted itself so far. It is making its distinct mark, yet sensibly retaining the good measures initiated by the previous government.
The government opted to defer the increase in gas pricing, but it is inevitable. Pricing of gas is only one aspect in dealing with India’s energy security requirements. India has to do whatever it takes to attract the ‘big boys’ in exploration and production (E&P) since we neither possess the financial resources nor the technical know-how. New Exploration Licensing Policy has been a failure. Out of 360 blocks in 16 years, only three are producing blocks. Foreign E&P companies need to be adequately incentivised to invest in India.
The government has made the right move in increasing foreign direct investment (FDI) in defence to 49%. India is the world’s largest importer of defence equipment, yet it lacks the so-called ‘buyers’ clout’. Encouraging more manufacturing will create the much-needed jobs. However, transfer of technology is unlikely to take place when the foreign partner does not hold a controlling stake. There is hardly any difference in shareholder rights between 26% and 49%. It may be prudent to further increase FDI limits in defence within the next six months if FDI is not forthcoming. A higher FDI shareholding could have riders like transfer of technology and compulsory listing within five years of establishment.
The thrust on urbanisation and housing has been most welcome. The rapid growth in the urban population is making living in existing cities untenable. The creation of new, smart cities is the need of the hour. For this, immense resources are needed. A greater thrust on the ‘Look East’ policy will help garner long-term funds from countries like China, Japan and Singapore that are looking to invest surplus resources in return for higher yields.
The liberalised norms for FDI in low-cost housing are another significant step. The government can make further headway if it were to offer a single-window approval mechanism specifically for low-cost housing.
This government is willing to explore consolidation of public sector banks and reduce its stake to 51%, which would garner resources upwards of $9 billion. Allowing banks to raise long-term resources with specific exemptions on CRR/SLR and exemption from priority sector requirements on infrastructure loans is a salutary measure.
Going forward, the banking sector will gradually reduce non-performing loans and stressed assets, especially as stuck projects begin to get operational. One would advise being cautious in establishing more asset reconstruction companies (ARCs). While there may be merit in sector specific ARCs, it would be prudent to first understand why existing ARCs have not performed well before pumping in fresh equity for new ARCs. Further, India needs bankruptcy laws and effective mechanisms where promoters of failed companies take adequate haircuts or give up management control.
Lastly, the government must capitalise on the current investor optimism. It must kick-start disinvestments immediately, but ensure offers are well staggered so as to not saturate the markets. Meanwhile, India needs to let the world know that it will be a hospitable host and is ready to go the extra mile to welcome long-term foreign investment.
PS: The greatest disappointment has been the continued disruption in Parliament. Who would disagree that there are more pressing issues for Parliament than the appointment of the PM’s principal secretary? He’s an outstanding officer. What’s good for the PMO is good for India. We now must pray not only for good monsoons, but also for parliamentarians with common sense.
Deepak Parekh is chairman, HDFC Limited
The views expressed by the author are personal