RIGHT TIME FOR TOUGH DECISIONS

Arun Jaitley will be presenting his maiden Union Budget as Finance Minister on the 10th of July. The first Budget of the Modi-led NDA government will be a keenly watched, as lot of expectations have been built around it. In fact, the financial and economic roadmap that the government will define in its budget is the very basis on which the BJP-led NDA alliance has come to power. The past ten years have been rather painful for the Indian economy. The GDP growth had slackened to seriously worrisome levels, the Indian currency underwent lot of depreciation owing to poor international trade, high inflationary pressures had resulted in higher interest rates and overall business sentiments had hit a nadir. We Indians in general have a peculiar nature. We expect a person assuming a public office to work instantaneous wonders, and that creates huge pressure of the kind that Team Modi is currently witnessing. There are a couple of things that we have to remember and ponder over. One, there is no magic wand in the hands of government that can be waved to get over the difficult economic situation we are currently mired in. Two, one has to come to terms with harsh decisions and measures that the government will have to take to tide over the economic difficulties and bring the economy back on track.

 The rail fare hike is the best example of what I have just stated. There is much discomfort over the steep hike in fares proposed by the Railway Minister. Firstly, he has followed his predecessor’s footsteps of not waiting for the Railway Budget to be presented in the Parliament, thereby rendering that exercise a mere formality. Secondly, the economic rationale behind the steep hike is simply not understood or grossly misunderstood by the people at large. The rationale for the steep fare hike is no rocket science. The Indian Railways have been running at a loss over the last few years. The only way that the Railways can continue to survive is when users pay for the facilities they avail. The passenger services have been subsidized by the freight traffi c, but in recent years, even the freight fares have come under pressure. This simple explanation comes from the man who matters the most for the Indian economy – the Finance Minister himself. For those who feel that the move of hiking the fares is ill-timed, here is a reality check. On 5th February, 2014 when the UPA was in power, it was the Railway Board which had proposed a five per cent increase in freight rates and a 10 per cent hike in passenger fares. The proposal was to rationalize the freight rates with effect from 1st April, 2014 and the passenger fares with effect from 1st May, 2014.

Even as the interim Railway Budget was in the making, the date 1st May, 2014 was chosen hoping that the General Elections would be over by that day. The Railway Board had proposed that this increase would give the Railways additional revenue of `7900 crore. Armed with this decision, the then Railway Minister Mallikarjuna Kharge met the then Prime Minister Dr Manmohan Singh on 11th February,2014. Singh approved the hike and suggested that the hike in both freight and passenger fares should be implemented with effect from 1st May, 2014 itself. Even as the election results were being declared on 16th May, 2014, the Railway Board notified this increase on that day itself. This notification gave effect to the decision taken by the Railway Board, the Railway Minister and the then Prime Minister. However, as the defeat of the UPA became clear, the Railway Minister countermanded the order of the Railway Board so that theoretically the decision taken by him and the then Prime Minister would get implemented by the Railway Minister of the NDA Government! What the current Railway Minister has done is that, merely withdrawn the countermanding order issued by his predecessor. By doing so, Gowda has decided against allowing the Railways to continue to bleed and prevented it from getting into a debt trap. Though the decision seems to be a harsh one, the withdrawal of the countermanding order only reflects the resolve of the new government to put the Railways and the economy back on track. Taking such harsh decisions in the initial years of its mandated five-year term will help bring back the super growth years of the Indian economy.

 The markets have looked at this very indifferently. In fact, decisions like these which are likely to kick-start growth once again will always be welcomed by the markets. For now, the larger worry for them is the precarious global geopolitical situation. The internal conflict in Iraq is worsening and that surely is not good news for us. After pretending to ignore the noise around it initially, Indian markets have been slipping on oil concerns. Benchmark indices have moved down following further escalation of the ISIS-led terror strife in that region. Crude remains the main concern for the markets and the worry about supply shortages have become more acute following the mess in Iraq. That clearly means higher crude prices in the international markets and disruption in the economic resurgence in the Indian context to some extent. The sooner this strife comes to an end, the better it would be for us.

 The timing or the extent of global intervention is as yet unclear on the Iraqi front. Its neighbours are looking to step in with military assistance to help end the ethnic cleansing by Sunni terrorist militias and restore normalcy in the region. The US, which was fighting a battle in the region to form a government a few years ago, is now facing the prospect of battling the militants to save the Iraqi regime. The cost of the war is humungous, and with the US economy now on a recovery curve, it is unlikely that the US may be willing to step into the Iraqi territory once again. Also, since the US is now less dependent on external sources for its energy needs, it will have limited national agenda to come to the rescue of Iraq. In these circumstances, the strife could go on for days, with the result that crude could get dearer. The Indian economy surely seems to be on the verge of getting hit. The new government has been moving fast to ensure that a mismanaged economy is put back on its feet so that it can at the least start walking, if not running. All the ministries are working at a hectic pace and talks of revamping, re-looking and, in some cases, even changing legislations passed by the previous government is on the cards. Some of these moves are welcome.

 Just when the markets were gearing up for the next big leap, Iraq happened and that has put the market’s onward journey on a hold. However much one may want to ignore it, the simple ground reality is that we do import crude and its rising prices will certainly hurt the Indian economy. The negating factor (Iraq conflict) currently has a higher weightage than the positive factors (government actions and their expected positive outcomes). All these factors clearly indicate that the markets are going to remain in a confused state of mind – atleast in the near term. In times like these, fundamental long term calls are the most pragmatic ones to take. The economy is on a bend where a long term improvement is well in sight. The short term hiccups, whether resulting from government action on the domestic front or from geopolitical factors, will have to be negotiated with a cool mind. In fact, I think it more important now to understand the broader picture. Our Cover Story this issue will help you in doing exactly that. Views of some of the most important personalities on the economic situation should help you understand what the future looks like. The new dispensation at the Centre is at work and the right interpretation of its policies and actions is what will help you in negotiating the future in a much better manner. We sum up with our regular recommendations which will continue to add strength to your portfolios.