China may be getting a foothold; Jaitley should now push steps to revive investor confidence

There are reasons to believe that some good news is finally coming out of China with the country’s government and the central bank assuring the world, at the G-20 meet in Ankara, Turkey, that a damage control plan is on cards, including a public spending stimulus.

The Chinese central bank has assured that the yuan is not on a long-term devaluation course and most of the correction in the local bourses is over.

But the bigger news is that the Chinese government plans to increase spending in the economy to 10 percent this year from the earlier budgeted 7 percent. For an economy of China’s size ($10 trillion), a 3 percent increase in spending is a massive booster dose. If that plan works out, the Chinese crisis might not worsen in a big way from this point as currently feared by the world.

 China may be getting a foothold; Jaitley should now push steps to revive investor confidence

Representational image. Reuters

In a separate development, the National Bureau of Statistics of China revised its annual economic growth rate in 2014 to 7.3 percent from the previously released figure of 7.4 percent. Being the second largest economy in the world, any development in Chinese economy does have a huge bearing on the rest of the world, including India.

As per the revised estimate, the country's 2014 gross domestic product stands at 63.6 trillion yuan ($10.00 trillion), down by 32.4 billion yuan from the initial estimate, according to a statement issued by the bureau.

Struggling growth engine

Finance minister Arun Jaitley remains “positive” on GDP growth rate this year.

"Eventually, when these transient things blow over, then it is the real economy that is going to matter... India's ability to post a respectable growth rate looks very positive this year," Jaitley has been quoted as saying on the sidelines of the G20 Finance Ministers and Central Bank Governors Meeting.

But, things do not look very promising for the country as of now. The biggest worry is to get the momentum back in the economy. Until now, there aren’t any signs of this happening.

India’s gross domestic product (GDP) growth at 7 percent in the April-June quarter is lower than the 7.5 percent recorded in the preceding quarter but higher than the 6.7 percent growth logged in the corresponding quarter last year.

The pain points are segments such as steel and cement, which indicate the slowdown in the core sector growth activity. The seeming revival in government spending hasn’t really reflected in the numbers yet.

The government expenditure as represented by public administration, defence witnessed low growth of just 2.7 percent. Similarly, gross fixed capital formation numbers too have disappointed economists, with the rate continuing to decline to 27.8 percent in the quarter from 29.2 percent a year ago.

As Firstpost has noted before, a slowing China is actually an opportunity for India since India has strong positive fundamentals to catch global attention.

But, the country needs to spruce up public spending, get its reform process quicker and revitalise its banking system to get the momentum bank.

The ongoing tug-of-war between the BJP and the Congress-led opposition that has slowed down the reform agenda, wouldn’t augur well for the country to emerge stronger. To convert the global slowdown an opportunity, India needs to revive the investment cycle and this is where the real challenge lies.

In the backdrop of lacklustre response from the private sector, the onus of kick-starting the growth engine primarily lies with the government through higher public spending.

This is something both the Reserve Bank of India (RBI) and government’s economic advisor, Arvind Subramanian, in the economic survey, have pointed out with critical importance.

Higher public spending is critical particularly because banks aren’t in a position to fund growth. Bank credit is unlikely to show any significant up-move unless bad loan burden on the books of banks eases in a meaningful manner.

So far, the stock of non-performing assets (NPAs) continues to stay high, so is the portion of restructured assets (together they constitute about 11 percent of the bank loans).

State-run banks, which typically lend to long-gestation high-risk infrastructure projects, are capital-constrained. Rating agencies have noted that even the recently announced Rs 70,000 crore capital infusion by the government might not be sufficient to fill the gap of capital requirement of state-run banks since they need to set aside money on losses on bad assets, besides meeting the Basel-III requirement norms.

The fact is that the Narendra Modi government has clearly failed to instil confidence among the investor community until this point by following on the promises of fast-paced reforms. The government’s much-hyped initiatives such as Make in India haven’t found much success so far primarily due to lack of fresh investments.

If the government wants to arrest the falling investor confidence, it needs to push ahead the reform plans with a sense of urgency in the areas of land, tax and labour reforms, by taking opposition into confidence. The government also needs to push ahead the disinvestment process quickly.

So far, against the Rs 70,000 crore disnvestment target this fiscal year, the government has managed to raise only Rs 12,500 crore. Cheaper commodity and crude prices are an advantage for India. But, as long as investors are not putting money on the table, it is difficult to get the growth momentum back.

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Updated Date: Sep 07, 2015 12:48:43 IST