Only a miracle can save the Indian economy from Modi govt

Prime Minister Narendra Modi at the foundation stone laying ceremony of a bridge between Okha and Beyt Dwarka in Gujarat on Saturday.

The economy is in the middle of a downslide, if not a tailspin. The Prime Minister and his Finance Minister can only be cheer leaders at best as there is little room for them to do anything else. By reducing excise on petroleum products, it had used up whatever little room it had and they would have to go back to increasing the excise rates on petrol and diesel, as soon as crude prices get a little softer.

The Reserve Bank of India (RBI) has already indicated that a downward revision in interest rates is unlikely in the short-term. It has also indicated that there is little room for a stimulus package.

The government’s decision to reduce the excise duty on petrol has marginally brought down the prices for consumers but it is only a matter of time before the government would revise them again. While the move would provide some short-term relief to consumers, mounting fiscal worries could force the government to hike duties when prices soften.

A two-rupee decline in the excise duties would translate into a Rs 13,000-crore loss in revenue for the remainder of the year and considering that government had touched 96 per cent of the fiscal deficit targets in August itself, the government does not have too much room. It is only a matter of time that the government would be forced to hike taxes again.

Price of the Indian crude basket had gone up almost 18 per cent between July 20 and October 3 when the decision was announced and prices of petrol went up by a massive Rs 6.51 per liter, pushing petrol prices to levels of July 2013, when the price of the crude were 74 per cent higher than the present levels.

A political uproar followed and the BJP’s core base among the middle class, which has been hit by a slowdown, was up in arms against the government. This pushed the government into cutting taxes to ensure that they remained in the game at the beginning of the election year but the government also understands that they played the only ace they had.

While all other sectors of the economy have been subdued, about Rs 2.5 to 3 lakh crore of revenues are coming from taxes on petroleum products. With the economy in trouble and private investments not coming through, the future growth story depends on how much money the government can pump in to boost demand. Frankly, the government does not have the money to provide a stimulus package, unless it decides to cross the fiscal Lakshman Rekha, which will have its own consequences.

The government may not be too worried about the possible 1 per cent increase in inflation if it is able to show some kind of revival on the ground, but the Rs 40,000 crore stimulus package may not be enough to bring about a significant impact on the ground. There would be a time lag between the government making the announcement and the money reaching the ground. With elections only about a year away, it may not have time on its hand.

Under the circumstances, the sale of Air India, the strategic disinvestments in Pawan Hans & NPCIL and listing of companies like GIC, New India Assurance may help the government get close to its ambitious disinvestment targets of Rs 72,500 crore this fiscal but that has largely been factored in.

The GST remains a key problem area because it remains to be seen on how much revenue will the government get from the head and if it would be able to keep its promise of covering them for possible revenue shortfalls, made to the states. The government has reportedly diverted Rs 56,700 crore from the Clean Energy Cess to meet possible shortfalls but we still don’t know what kind of shortfalls we will end up with and what kind of disruptions our states will see and Finance Ministers from Congress-ruled states indicate a dip in state revenue collections.

All this will put the government’s fiscal management skills to test with the nation closing in on the 2019 Lok Sabha elections, the government does not have too much time on its hand. Unless a miracle saves the government, we are looking at the government breaching the fiscal deficit targets.

The consequences of ignoring fiscal deficit targets are expected to be felt in the ratings of India as an investment destination and the last thing that anyone wants now is downgrade in credit ratings. FIIs have pulled out more than Rs 40,000 crore from the stock markets since August the markets are hanging by a thread as PE ratios of close to 26 could well mean that the markets are overvalued.

The Modi government had promised a miracle but with a year to go for the government does not have much to show and worse, there is very little room for a last-minute miracle. The term of the Modi government could well go down in history as a wasted historic mandate.