A clueless government wrestles with the economy and trips 

As Prime Minister Narendra Modi nears the end of his five-year term in office, only the din of achhe din is echoing in our ears. The thrill is gone. Everyday feels like an office-goer’s Monday.

Investors are dismayed. Both the Bombay Stock Exchange’s benchmark Sensitive Index and the National Stock Exchange’s Nifty 50 have dropped by 13% from their highest points on 28 August. That is modest, compared to the mauling of mid-cap and small-cap shares, whose indices are down by 28% and 32% respectively from their peaks this year. The Shanghai index, Hong Kong’s Hang Seng and South Korea’s Kospi have also taken hits. But that provides little comfort to the Indian investor whose capital has eroded.

So far retail investors have not lost nerve. Net investment in mutual fund equity schemes increased to ₹11,251 crore in September, almost double the August inflow of ₹5,923 crore. Mutual fund investors seem to be thinking that dips are an opportunity to buy, so they can sell and make profits when the market recovers. But if the market drops further, there will be panic selling. Some observers say the bull run which began in 2013 has petered out and we are in the grip of a bear market.

With US rates rising, foreign institutional investors are shifting money from risky emerging markets to risk-free US treasury bonds. Foreign institutional investors have net sold (sales minus purchases) stocks worth ₹65,705 crore and bonds worth ₹38,288 crore so far this year. Domestic institutions have net invested about ₹35,000 crore in the stock market, but overall inflows are declining.

On 28 September, the US Federal Reserve raised a key benchmark rate by 0.25% points to 2.25 per cent, the eighth increase since December 2015. The US economy is growing furiously. The annualised rate of growth was 4.2 per cent in the last quarter as corporate earnings have been buoyed by President Donald Trump’s tax cut. The unemployment rate is at 3.9%, the lowest since 1969. US consumer prices rose 2.7% in August, bringing the inflation rate for this year to 1.9%, a tad lower than the Fed’s target rate of 2%.

Even as the US has raised its interest rates, the European Central Bank has kept them unchanged for a long time. Interest rates are negative in Japan. That makes US bonds attractive, strengthening the dollar as money flows in.

The Rupee has been the worst performing Asian currency this year. It has depreciated by about ₹11 against the dollar in the last 10 months from an average of ₹63.64 in January to ₹74.38 this month. The Reserve Bank has said it will let the Rupee find its own level. In its monetary policy earlier this month, it left the rate at which it lends to commercial banks unchanged at 6.50% against wide expectations of a 0.25% increase. Some analysts say that this sends the wrong signal to speculators and if the Rupee goes into free fall, the stock market will follow. But some others say that a weak rupee will make exports competitive and the inflow of dollars will shore up its value.

But India also has sticky imports to worry about. India imports a large amount of crude; in the last financial year imports accounted for 83% of consumption. The value of India’s imports of crude oil and petroleum products net of exports was $66 billion.

The pain caused by a falling Rupee has been aggravated by the rise in crude oil prices. The cost of the mix of crude oil which India imports has risen from an average of $54.43 in the last financial year to $77.88 in September. Consumers are hurting. The retail price of a litre of petrol in Delhi is ₹82.03 and that of diesel ₹73.82. Taxes, state and central, constitute 43% and 33% of petrol and diesel prices respectively.

The government has been asserting that it will not reduce petro-fuel taxes in order to discourage consumption. Rathin Roy of the Prime Minister’s Economic Advisory Council said on television that car users were an elite group; they should not be subsidised. Costlier fuels would crimp demand, he said, and help shrink India’s widening current account deficit (the gap between the country’s export and investment receipts and outflows). Environmentalists also say high taxes on motor fuels are needed to reduce earth-warming emissions. Even newspaper editorial writers said high taxes on fuels should stay.

But high crude oil prices have made farmers restive. They need diesel to work their pumps and tractors. Diesel prices are 32% higher than a year ago. Iffco, a producer of fertilisers in the cooperative sector, has raised the price of DAP, a plant nutrient by 30% from this month. The price of a mix of nitrogen, phosphorus and potassium fertilisers is up 27%. Pesticides are also dearer.

Yet the Commission for Agricultural Costs and Prices (CACP), has estimated the cost of cultivating wheat during this winter season at just 6% higher over the last season. Its hike for chickpea (chana) is 7% and for barley less than 2%. Though the government has announced support prices which are 50% more than the CACP’s estimated costs, farmers are not impressed. The government does not procure commodities like pulses and oilseeds; so, the support prices are symbolic.

The latest farmers’ group to agitate in Delhi was led by the Bharatiya Kisan Union. The protesters were relatively prosperous western UP cane farmers. But they are feeling the pinch of unpaid cane dues and rising costs. They were stopped with police force on October 2 at Delhi’s borders. Among their demands was a reduction in diesel prices.

The government has blinked and has cut excise duties on petrol and diesel. It has also signalled a reversal of reforms by forcing the oil companies to hold back price hikes. This has been taken badly by the investor community. The shrinking profits of the oil companies will affect their ability to invest in oil exploration and production.

The HODs of Indian Agricultural Research Institute (IARI) were directed to attend, along with faculty and students, a national workshop on “Yagnya for Sustainable Development Goals 2030’ at a campus auditorium on 3 October, as desired by the competent authority (read the minister)

The government has to blame itself for the predicament it is in. If the oil subsidy increases, the fiscal deficit will widen and that will have an impact on inflation, interest rates and economic growth. Crude oil prices fell from $106 a barrel in the last year of Manmohan Singh’s government to $84 a barrel in the first year of Modi’s term. in the following two years they fell to $46 and $48 a barrel and rose to $56 in 2017-18. But high tax rates on fuels were left intact and the government earned huge revenues.

These should have been used for investment in the railways, which are much more fuel efficient than trucks and buses, in expanding the piped gas network to homes and factories, and in power grids so rural folks are assured of electricity. But little has happened in the Railways despite former Railway Minister Suresh Prabhu’s grand announcements. Nor has his successor, Piyush Goyal, brought about a steep change in the working of the somnolent ministry.

The obligation imposed on manufacturing companies to source a portion of their power from renewables has resulted in thermal power plant capacity being underutilized, driving up their fixed costs per unit of electricity. Thermal power plants are operating at 60% capacity; their finances have been repaired through a debt restructuring programme but unless theft is curbed, and consumers metered and charged, their finances will remain strained. New thermal power capacity is not coming up because of the uncertainty created by the PM’s premature emphasis on solar and wind energy.

Exports in the last financial year at $303.5 billion were $28 billion higher than the previous year but are still below the mark of $314 billion touched in the last year of the UPA-II government. The global trade environment has no doubt worsened because of President Donald Trump’s protectionist policies but the shock of demonetisation, the delay in refunding GST to exporters and the government’s ideological bias against the meat industry has affected labour-intensive exports of buffalo meat, footwear and leather products. This will show up with a lag.

In the past three years, India exported about 1.3 million tonnes of buffalo meat annually on average. This has fetched annual revenues in excess of $4 billion. But in the first five months of this year just 0.5 million tonnes of buffalo meat was exported. This is below the trend. The harassing of cattle traders by cow vigilantes, the shutting down of slaughter houses in Uttar Pradesh - the biggest buffalo meat-exporting state - and the uncertainty created by the government’s notifications on rules for trading in cattle markets will only affect exports but also hurt the dairy industry and dent farmers’ incomes.

Agriculture Minister Radha Mohan Singh seems to live in a fantasy land. He believes the government’s policies of the first three years resulted in record grain production last year. But, more output had not fetched higher incomes for farmers in the absence of market reforms in agriculture and continuation of inherited restrictions on stocking by private traders. Average agri-GDP growth in the first four years of this government, at 2.5%, is half of the 5.2% growth achieved during the first four years of UPA-II.

Farmers need seeds that improve their productivity, but the agriculture ministry has created such uncertainty in the intellectual property regime that two companies, Dow Agro Sciences and PHI Seeds (Dupont/ Pioneer), have decided to not go ahead with their trials of genetically-modified maize. The UPA government was also hostile to GM crops though Prime Minister Manmohan Singh had publicly expressed his support for the technology, which holds great promise, and cautioned against “unscientific prejudices.” But his government did not mess with the pricing and patenting of GM traits.