Prime Minister Narendra Modi's meeting on Thursday to gauge the performance of various ministries and the hint that a performance review will now be done every three months reminds one of a corporate CEO who is fast running out of time to finish his task.
The deadline is near and the vertical heads cannot fail him. More importantly, the exercise, the first such since Modi took over the reins of the country in May 2014, should be seen in the context of the rumored cabinet reshuffle. It is also a signal that laggards won’t be spared.
In his earlier role as the Gujarat chief minister and now as the country's prime minister, Modi has been known to be a task-master, an administrator who is eager to see results. This vigilance is in order today when India’s real economy is still refusing to shed its tag of a struggling engine, with tepid manufacturing activity, mounting stalled projects, inadequate private investments and a huge chunk of bad loans, which are collectively slowing the economy’s true potential.
Modi has realised that there is not enough time to carry out the tough task of repairing the economy as his government is entering its final years (three more years), when governments normally focus on getting re-elected than doing house chores.
Of the issues at hand, the problem of a high number of stalled projects should be the urgent priority for Modi. Reviving this chunk could give a serious push to India’s economy that is projected to grow 7.6-8 percent this year — the highest among large economies in the world. Many of the problems such as the burgeoning pile of bank non-performing assets (NPAs) can be traced back to projects that have fallen sick, forcing their promoters to stop repaying banks on time. Also, this is a major drag on Modi’s ambition of changing India into the world’s manufacturing hub and creating jobs to millions of Indians that enter the country’s workforce every year.
At this stage, the signals aren’t very encouraging.
Since Modi took over as prime minister, the chunk of stalled projects rose to its highest level for three consecutive quarters, according to a 5 April report in the Mint newspaper. The report, citing data from the Centre for Monitoring Indian Economy (CMIE) said the percentage share of stalled projects in total projects has risen to 12.3 percent for the quarter ending March 2016. The January-March period saw the value of these stalled projects rising to Rs 11.36 lakh crore from Rs 10.79 lakh crore in December. One in five investments in the private sector is stalled, while in the government sector, the ratio of stalled projects is slightly more than one in 20, the report said.
Funds, an issue
The main reason why stalled projects are rising is because of lack of funds. This problem has been highlighted by the World Bank too recently, when it said the country needed to revive ‘stalled engines’ including private investments and rural demand, to sustain the 7.6 percent growth rate.
Private investment cycle hasn’t resumed yet, putting the major onus on the government to shell out money to oil the infrastructure growth. But, the fiscal burden on the government especially after the 7th Pay Commission wage hikes to over 1 crore serving and retired employees leaves one with a doubting mind on the ability of the Modi government to significantly push up public spending.
Though some improvement has been witnessed in recent months, the reason why private investors are averse to taking big investment positions in India is due to lack of clarity on labor, tax laws and resolution of stressed assets. The passage of Bankruptcy Law by the Upper House in May, 2016, is seen as an important reform step in easing banks’ difficulties in finding quick resolution in the stressed asset cases. Also, if the government finally manages to clear the Upper House test for the crucial Goods and Services Tax (GST), it would be seen as a major enabler for Modi to change the investor perception on India’s fading reform-focus. But, GST is still long way from the implementation stage as it is entrapped in a political tug of war.
New projects vs old
In his five hour-long review meeting, the PM is said to have told his ministers to focus on the projects at hand and not announce new ones. This is a good strategy since focus should be on the implementation level. The PM should apply this rule to himself as well. The first two-years of the Modi-government has seen launch of several, catchy-named schemes including the PM’s Jan Dhan Yojna, Make in India, Start Up India, Skill India and Swachh Bharat, many of which are criticized by the opposition for slow pace of implementation on the ground. If Modi uses his good offices to aggressively pursue the chunk of stalled projects across various sectors, pushing the concerned ministries, the industrial recovery could come sooner than expected.
When the Modi government came to power, there were active efforts to identify the reasons for stalled projects and rectify the problem. Subsequently, there has been an improvement in the stalled project situation, which later worsened yet again, resulting the pile to grow bigger.
One of the major reasons for bank lending to industries almost coming to a grinding halt is not just capital but lack of creditworthiness of companies sitting on stalled projects, causing cost-over run and strain on their balance sheets. As outgoing Reserve Bank of India (RBI) governor informed a parliamentary panel on Thursday, state-run banks have not been lending to industries despite sitting on cash. The only reason why banks are doing so, one can imagine, is the precarious level of stressed assets in the banking sector. At the last count, the total stressed assets (bad loans and restructured loans) in the banking sector stood at 11.5 per cent of the total loans given by banks.
When there is great deal of bad loan built up on banks’ books, it’s not surprising that lenders do not want to take further lending positions. The problem, yet again, comes back to existing stock of stalled projects. Once projects are back on track, the demand for working capital and long-term finance will resume.
The PMO should also acknowledge the seriousness of the state-run bank recapitalization problem and get a clear long-term roadmap (right now what the government has earmarked is too little to fill the capital void) for survival of these lenders either by privatizing or finding the required capital for them.
Separately, the core sector growth data, released on Thursday, showed persisting pain on the ground. The growth in May stood at 2.8 percent as compared with 8.5 percent in the previous month. This would mean that the factory output numbers in May too will come on the lower side since core sector constitutes 38 percent of the Index of Industrial Production (IIP).
The delay in industrial recovery would further put pressure on banks as more loans will likely turn bad. Considering this backdrop, the urgent attention from the PMO to address the stalled loan problem is vital at this stage. A challenging external environment, especially after Brexit, poses challenges. But, addressing the problem of stalled projects is something the government can do on its own. In many cases, the problems pertain to environmental delays and bureaucratic red tapes. Clearing that, coupled with a final push on key reforms and a consumption-led push, could offer the economy just the right medicine it needs to get back to good health.