Economy: Where has Rs 5 lakh crore gone?
The economy is sinking, the profits we should have made are not visible; with lower oil prices savings should have gone up
The impact of low oil prices should ideally manifest themselves in higher figures in the current account balances. We are importing less in terms of dollars, we are spending less to purchase more, and we are seeing that benefit and positive turn in our current account deficit, which is now historically very low and therefore quite comfortable. On the other hand, we are seeing depletion in our foreign exchange reserves which have come down to below $350 billion recently on account of a very large pullout from the Indian market. Our foreign exchange reserves should actually have been going up because we are saving a lot because of the low import bill.
Now with regard to our fiscal deficit; we had put in this year’s Budget `65,000 crore as subsidies for petroleum products but the bill has been much less. In fact, the budgeted amount has also helped in wiping out last year’s arrears, which means the under-recovery that was happening for the oil companies has largely been offset in this year. We must also see what else is happening. For instance, because of the slashed import bill on account of higher excise duties that have been imposed on POL and also lower under-recoveries for the oil companies, there has been a saving of `5 lakh crore. This number is important because I am going to talk about what is not happening. So we should have seen the rupee being strengthened, because the demand for the dollar has gone down. That’s the received wisdom: the price of petroleum is lower, this should have exerted less pressure on it. Instead, what we see today is that the rupee is now exchanged at $68, and in the non-deliverable forwards market the rupee is ruling at about $72. In 2013, the rupee had been sliding, there was huge panic in the market, there were forecasts that the rupee would reach $80 or $100. The government was blasted for its inability to keep the rupee in check. Today, there is not even a whimper; the predictions are that in this current year the rupee will go beyond $70. Despite the fact the prices of products and goods have fallen, the rupee is weakening.
Another interesting phenomenon is that oil is becoming more of a financial asset. No longer is oil used as a commodity. So there is a lot of forward trading and speculation on oil that is making the product extremely volatile. Therefore, it is not simply the demand and supply issue today, but how the punters are looking at oil in the futures market, how it is going to determine the prices, and how we need to deal with volatility.
The impact it will have on remittances is apparent. For every $10 increase in petroleum crude prices there is an increase of $0.18 in remittances. This correlation has been established and therefore when the prices go down there will obviously be a decline in the remittances. This happens after a lag of one or two years, we haven’t seen it happen this year but it will happen next year.
In this oil scenario we have saved about `5 lakh crore, which is a huge amount. The fiscal deficit should have been much below 3.5% of the GDP but now, according to the mid-term economic review, the entire issue is to breach that target to have a higher fiscal deficit to increase spending on infrastructure. Where is all the money we are saving going? This needs to be looked at. Why is it that we are venturing further into the market to borrow because that will have an adverse effect. What is happening today is that there is no demand, at best we have sluggish demand. Therefore we are seeing a deceleration in the growth rate. The IMF has said the country’s growth rate will remain at 7.3% in the current fiscal year while for next year they have predicted 7.5% and the same for 2018. Even if there is an increase, it will be extremely marginal, almost negligible, and the next two years it will be flat.
We are also seeing that exports have deteriorated very sharply, non-performing assets of banks have spiked (close to 12% though unofficially it could be higher). Private investment is flat, whatever growth we are seeing is credit-less growth. There is a lot of emphasis on public spending, but the impact on the economy is not being seen. Even though public investments have gone up exponentially and despite very low inflation we are not seeing consumer demand picking up in the country.
Where does the problem lie? Well, the whole story is not being seen in totality, there is something missing in the government’s gameplan to deal with this situation. The first priority area is the health of the banks. In the 2014 Budget we had said that the government has the intention of bringing its equity in public sector undertakings to 52%, but till today we haven’t seen any divestment in any of the banks. Money that was supposed to come from divestment was to go back into the banks for their capitalisation, according to the Basel norms, by 2018. Indian banks have to be recapitalised to the tune of about `3 lakh crore but we haven’t even started the process yet and it’s already 2016. The health of the banks is currently extremely precarious and they must be shored up with fresh capital. Despite the government promising more infusion, we haven’t seen anything happening on that count. Unless the banks’ health is restored, we will find very little credit moving.
The July 2014 Budget had said there would be a National Infrastructure Investment Fund (NIIF). This was conceived on the lines of CARP in the US. The idea was to have a `20,000 crore Budget fund that would run on professional lines. It would move into these stressed infrastructure companies and buy out the equity from them. If required, the management would be changed and money provided for taking out debt as well as infusing new equity and nursing them back to health. After this, they would list them, sell their shares in the market, make money and get out. When the US treasury put money into the banks, they were able to make a profit of $800 million after they were nursed back to health. Private equity is not the answer. There is no dearth of them. There is, though, a paucity of healthy recipients who can get private equity in. In this year’s budget, I strongly recommend an NIIF.
We must ponder why we are not getting the benefits of the crash in the oil prices to get our economy going.
(Text of Arvind Mayaram's speech at the Hardnews Seminar.)