Why Jaitley should not give too much weight to Moody's moodiness

The reduction in Moody’s growth target for India in the current year due to a below-average monsoon and the stalling of reforms should give the finance ministry another wakeup call for action. However, it is no reason to panic. In fact, barring the legislative logjam - which can be cleared during the winter session once the Bihar elections are over - all signals are positive.

Finance Minister Arun Jaitley should, in fact, tell Moody’s it is wrong, and that the legislative agenda is not all that critical to growth revival. Even GST is not all that it is touted to be.

Consider the positives. The global fall in commodity prices, as this writer has repeatedly emphasised, gives India more gain than pain as we are net importers, especially of oil. Cheaper oil not only impacts the twin deficits - current account and fiscal - positively for us, but sets the stage for a growth surge from 2016.

A year of cheap oil and good management of food inflation has lowered inflationary expectations and created the right conditions for a revival of the investment cycle. Belatedly, the two other conditions necessary for revival (bank capitalisation and government capital spending) are being addressed.

A bottoming out of corporate performance is about to take place, and in the next two quarters profitability will revive, thanks to lower raw material costs, especially energy, and a steady paring down or reschedulement of debt. With all the stars in alignment, India Inc will benefit from a rebound in the business cycle. This is evident from the identical numbers thrown up in the IIP and the Consumer Prices Index (at 3.8 percent in June and July respectively). The 3.8 percent figure is a gain for IIP and a fall for CPI, indicating that we are now close to the ideal situation for growth.

Two things are, however, necessary for taking growth to another level beyond the 7 percent figure.

First, the finance ministry has to take the initiative for pushing growth boosters directly into the budget, given that budgets are the one thing parliament cannot block. Growth-enhancing money bills - special tax concessions for investment, a reduction in the corporate tax rate frontloaded this winter rather than next February, and a more formal black money amnesty scheme - would enable Jaitley to not only keep his fiscal promnises, but give him resources for public investment.

Jaitley can also evolve a new paradigm for fiscal deficit management by splitting it into two components - the structural fiscal deficit related to consumption and revenue expenditure, and the growth-enhancing deficits caused purely by higher public investments. Jaitley must promise to bring the first one down steadily, and keep the second part of the fiscal deficit flexible in order to improve the productive capacities of the economy by making capital investments. The second part should be counter-cyclical - higher when growth is low, and lower when the economy is firing on all cylinders.

The rating agencies may not like this, but with some convincing, they will learn to love it. The logic is simple: when the whole world is trying to stimulate growth monetarily or fiscally, it makes no sense for the rating agencies to read the riot act to India alone. Moreover, the world has made a mistake by depending too much on monetary stilmuli when the need is for public investment that can truly juice up the growth engines. The emphasis has to shift in the US, Europe and China from monetary easiness to fiscal props. This is what will revive growth. Ditto for India.

The second unexpected move Jaitley could consider is going slow on the goods and services tax (GST). In its current form, it is simply not worth expending political capital on it. It will not deliver the goods. What Narendra Modi and Jaitley could do is to openly announce that they will accept P Chidambaram’s criticisms of the bill and then bring that version to parliament in its winter session. Or else they are willing to abandon the GST.

This announcement could have two significant fallouts. First, the states gung-ho about it (West Bengal, UP, Bihar, etc) will see the Congress as villain of the piece and pressure the party to cooperate. Second, it will also pressure the states to throw more commodities into the GST pot - alcohol, petroleum products, etc - since the onus will now be on them to push the idea.

Jaitley should simply say: “I think the GST is good for us. We want the Congress party’s suggestions to be taken on board. States should put all commodities into the GST kitty so that it is truly beneficial. In any case, the Centre is compensating all states for any revenue loss for five years. I will add another safeguard, that if any state wants to withdraw at any stage, we will allow it to happen smoothly. GST is not a one-way street.”

By calling the Congress’ and states’ bluff, Jaitley may get more accomplished than by making it appear as if he is more keen on GST than the states, and that they are doing him a favour by signing on. If something benefits all, isn’t it time for the beneficiaries to put their shoulder to the wheel?

As for the land bill, the solution is clear. It is now up to the states to legislate it to their advantage.