It’s time for bold economic thinking: 

It’s time for bold economic thinking: 

Context

• Despite India’s rapid economic growth and forex reserves more than $400 billion, the state of the economy has been described to be ‘sinking’

What is the present economic scenario?

• India’s oil imports in FY13 was $164 billion and by FY17 it was only $83 billion, lowering the current account deficit as a percentage of GDP from 4.8% in FY13 to just 1.1% in FY17.
• The stock market is at an all-time high in anticipation of a surge in earnings which is yet to materialize.
• The RBI, in its latest monetary policy report, lowered the projected growth rate for FY18 from 7.3% to 6.7%
• Both the demonetization episode of 2016 and the introduction of GST in July have imposed short-term costs in the form of lowering of growth rate in the current fiscal.

How well has the government reforms worked so far?

• The current government has shown limited appetite for serious financial sector reform.

Bad loan problems

• It has been long on rhetoric such as ‘Indra Dhanush’ and has evinced little resolve to deal with the massive non-performing loans problem.

The recent RBI move to refer large stressed accounts to the National Company Law Tribunal to deal with the Insolvency and Bankruptcy Code which will likely lead to two consequences:

• The resolution will take a very long time
• The recoveries will be much lower than what would have been possible by way of one-time payments

Low investment confidence

• The lack of speedy resolution of the stress in PSU banks and corporate balance sheets has eroded business confidence leading to lower investment and poor job creation.
• The government announcement of a stimulus package may deal with the problem cosmetically rather than address it at its root.
• The aim to ring-fence boards and executive of PSU banks from probes by the three Cs, CBI, CVC and CAG, will impose a cost on the economy by delaying resolution of distressed loans and causing more losses to PSU banks.

Tax laws

• The regime for direct and indirect tax compliance in India is undergoing a fundamental shift for the better in a way that has not happened before.
• This is certainly going to expand the ‘production possibility frontier’ of the economy.

High savings culture

• The high savings in India are currently not directed to productive, long-term investments as corporates have still not been able to repair their balance sheets.
• The AC Nielsen Consumer confidence index for India in Q2 2017 was 128, declining 7 percentage points compared with Q42016, while global consumer confidence rose 3 percentage points during this time interval.
• Despite the fall, Indian consumers are still the second most optimistic among the 63 countries surveyed by AC Nielsen.

What needs to be done now to get back on the high growth track?
Five-step plan against undisclosed funds

• The current crisis to introduce an amnesty scheme, a la Indonesia, to allow tax payers to voluntarily disclose hitherto undisclosed income kept domestically and abroad can be used.
• The Indian government should announce a one-time program temporarily by when anyone can disclose previously undisclosed income held within the country and abroad, for which they will pay a small, one-time fine of 4%, while 50% of the domestic holdings
• The amounts thus invested will be locked for seven years with a compound interest of 4% per annum.
• Post redemption, the amounts and the interest thereon can be used freely for any lawful purposes in India.

Curbing black money

• Criminal prosecution should be instituted against Indian residents holding large sums of undisclosed income.
• By highlighting the automatic exchange of financial account data with nations such as Singapore and Switzerland, it can ensure that the scheme is taken seriously.

The work done so far by the SIT on money stashed abroad and the information obtained through Panama leaks could be a good input to test and start the scheme.

Focusing on bad loans

• Ensure that the full extent of the NPA problem is recognized latest by December 31 and that banks make necessary provisions in this regard.
• The consequent shortfall in equity capital adequacy for PSU banks should be met through recapitalization by March 31.
• The boards of PSU banks should be recast by bringing in persons with demonstrated professional experience and achievement.
• The selection of CEOs of PSU banks and determination of their tenure and compensation package should henceforth be the exclusive domain of their boards.
• Boards should be fully empowered decide on loan resolution by way of real restructuring, with or without haircut, and one-time payment.
• Clear guidelines should be established for such screening and vetting.

Infrastructure investments

• The money needs to be channelized in order to accelerate infrastructure investments, especially in agricultural storage/ support infrastructure, in post-harvest processing, water efficiency technologies, extension services etc. to make agriculture more productive.

Facilitate new export engines

•  Facilitate new export engines with ‘Make in India’ and ‘Serve in India’ initiatives on defense exports and medical tourism.