If the Modi government was expected to pull a rabbit out of the hat, well it has not materialised till now. As for the market, it has shed the Modi-premium completely having retraced the entire surge after the new government came to power.
Despite this reality, if anyone was expecting the finance minister to perform magic, that expectation surely was misplaced. Arun Jaitley’s second Budget did very little to trigger a bounce, or spur economic growth immediately. The bits and pieces Budget seems to lack a grand design and turned out to be quite uninspiring at first glance — no major tax cuts to spur consumption, no big push for public spending to pump prime the economy, or incentivise investments. Apart from the allocation for roads and railways, there was nothing meaningful enough to induce growth. Then again, the Seventh Pay Commission recommendations have not been accepted entirely — so the booster analysts were counting on to push growth in consumer discretionary, automobiles — may take its time coming.
But if you pause to think, it might not be a bad decision to prioritise fiscal prudence at this point in time. Not all is well with the global economy; the Chinese slowdown continues to be a source of worry, while growth rates in the US is waning too. With global markets on tenterhooks, it is good to have some headroom for intervention in a SOS situation.
Not just that. By keeping the deficit under control and limiting government borrowing – the net government borrowing for FY17 is estimated at ₹425,000 crore, which is lower than what analysts were expecting – the government has made room for some rate cut by the central bank. Bond yields have already dropped and the lower borrowings will allow the apex bank to probably cut rates faster. This will help banks shore up their treasury income at a time they are in dire need of cash.
The biggest disappointment in the Budget has been the lower-than-expected allocation for bank recapitalisation. That is not an easy problem to solve but there are hints in the Budget in terms of how the problem of capital could be solved when the need (or the pain) is acute. While the Budget itself talks about conflict resolution in PPP projects, which has been a significant source of bad loans, measures outside the Budget like introduction of minimum import price for steel provides some respite to domestic companies that are on the verge of bankruptcy due to high leverage and global economic stress. If steel companies escape the slaughter from cheap imports, and some PPP projects are brought back to life through renegotiation, or banks actively force managements to sell assets, we are looking at a cleanup without any major intervention by the government.
None of the above measures will yield immediate results or solve the bad loans problem immediately, and that’s why the minister has tactfully thrown the googly of testing the pulse with statements relating to reducing the governments stake in IDBI Bank, and consolidation. Neither of these will be easy moves, but it simply keeps the hope alive that the government will eventually find a solution to this thorny issue if things do not resolve by themselves. In the end, this approach only means that one needs to reconcile to slower growth rates, as banks focus on cleaning up their house rather than go on a lending binge again.