Challenges Ahead Of The New Government

While everyone on the street is celebrating the huge margin victory of the BJP led NDA government, even the equity markets were quick to reckon the same with indices soaring to new highs. But we feel that now the time has come to look beyond. The biggest factor behind the dismal performance of the congress was its inactiveness on the reforms front and high levels of corruption. Rather, if one analyses the performance of the UPA I and UPA II government, one can easily find out that it was the good work of the BJP government from 1998-2003, which created a good momentum in growth terms for the UPA I. However, the UPA II was a big failure as the government did not focus on growth in UPA I. And that is the reason there are many macro economic factors that got affected. Be it the higher fiscal deficit, current account deficit or be the higher social spending, there was all mess on the financial front.

With this much of the financial mess created by the earlier UPA government there are lot of challenges ahead of the new cabinet formed by the NDA. So what are those challenges? Let find out.

First and the foremost factor that the Modi-led NDA government has to tackle would be the presentation of the budget. With Arun Jaitley getting the finance portfolio he has got a tough task ahead of him. If we look back, the vote on account presented by the P Chidambaram was highly criticised as there were many lose ends to it.

DELIVERING A BUDGET THAT CONTAINS THE FISCAL DEFICIT

It was clear that any new government would have to fix finances that are currently in dire straits and if any action is not taken, then things could get worse. Here, the UPA played very smartly as to achieve a revised fiscal deficit target of 4.6 per cent of gross domestic product for the year ended in March 2014. The Congress-led government cut spending by USD 13 billion and pushed about USD 16 billion in subsidy costs into the next fiscal. This was a smart move from UPA, as with the track record it had, it was sure that UPA won’t come to the power again. And hence, it has created all mess it could make on the balance sheets for the new government.

It seems it is a big challenge for Jaitley, as the main source of revenue, the tax revenues are unlikely to recover immediately in this current scenario of weak economy. We feel it would take some time from now onwards that the economy revives and the tax collection picks up pace once again. The government’s tax-to-GDP ratio has slipped to 10.2 per cent from a peak of 12.5 per cent in 2007-08. We are of the opinion that the growth would start to get some momentum in second half of FY15. As a result, it would be only in the next one year that the growth would tickle down to the end levels.

MANAGING RBI AND POSSIBLE EL NINO IMPACT

The new government would have to face a challenge which the earlier government did not face. Yes, we are talking about the El Nino factor affecting the rain fall and ultimately affecting the food production. The inflation has been one aspect that is affecting the whole investment cycle in India. As inflation is high, the RBI has kept its stance hawkish keeping the liquidity comparatively tighter. As a result the interest rates are higher, ultimately affecting the capex and investment cycle. Now, the Reserve Bank of India wants to bring down annual consumer price inflation to around 6 per cent from the current 8.1 per cent by January 2016, which would likely mean more interest rate increases. Rather Dr Rajan categorically stated that interest rate would be the right tool for containing inflation. Further, his differences with the NDA government are already in news. Hence, managing these two factors would be another challenge for the NDA. (Further we have provided a detailed analysis on the inflation front in our cover story.)

REVIVING THE PRIVATE INVESTMENT

As we have already mentioned, higher inflation would be resulting in higher interest rates and this would not only affect the public investments, but also the private investments. Hence, reviving the private investment despite the difficult macro economic factors would be one of the biggest challenges for the BJP government. Market hopes on Modi-led administration largely depend on perceptions of his track record as chief minister in Gujarat, where he is widely credited with attracting investment. However, questions are being raised about replicating that model nationwide. In its manifesto, the BJP promised to cut red tape and encourage foreign investment in sectors needed for job and asset creation. Capital investment contributes nearly 35 per cent to India’s economy, but it barely grew in the fiscal year that ended in March as delays in clearances and funding issues grounded many infrastructure projects. That is particularly the case with state electricity boards, which remain hobbled by losses, caused in part by costly fuel and little pricing power.

Short of recapitalising state utilities, the central government has few choices in pushing for a restructuring. Coal supply is also a key constraint in large part due to the financial difficulties at state power generators. Though the government has actually provided certain solutions to keep both the sectors under one ministry, it is quite difficult to provide a solution on immediate basis.

We feel these are few of the challenges ahead of the government that needs immediate action. However, one needs to understand that, though the actions taken would be immediate, results may tickle down after some time only.