How we performed in FY14: Financial Express April 4 2014

With the fiscal year coming to an end, most of the data points are predictable, though the final numbers will be out in the next couple of months while the revisions could follow after a year or so. Can we draw a balance sheet of all that has been achieved and lost during the course of the year? In fact, being the terminal year of the government in power, it is normally judged on the most recent performance, in this case, that in FY14. How does the canvas look? As can be expected, it is a collage of different colours and images indicating a mixed picture. The achievements have been significant given that while the year began on a neutral note, things deteriorated quite fast during May-September. However, the government was able to pull things through and reverse some of these adverse conditions to ensure that we got back to the starting point at least. Four achievements stand out here. First, the fiscal deficit target has been achieved, and notwithstanding the compromises made, credibility has been restored at a time when virtually all the assumptions made when the Budget was being drafted were trashed as growth slowed down for the second successive year. Bettering the fiscal deficit target by 0.1% of GDP and keeping it at 4.6% was a positive. Second, the aggressive combat against the CAD was another breakthrough at a time when conditions looked desperate. The relentless battle against gold imports was finally won and while a lot of support came from a sluggish economy which lowered demand for ‘non-gold, non-oil’ imports, the CAD would eventually be around 2% of GDP, which is remarkable. We are in a situation today where we can seriously reconsider gradually freeing the same. As a corollary, getting in big dollars by opening the swap window on FCNR (B) deposits was a strong supporting measure. Third, the government has gradually shifted the price of diesel to near-market and more importantly, we have gotten used to it. If persevered with, we should be in a position to remove the subsidy element over a period of time. It has been done in a non-obtrusive manner which is important. Fourth, interest rates have been quite appropriately anchored around inflation to ensure that real interest rates are maintained which has been done under a lot of pressure given that the government was against such a move. RBI certainly stood firm with its consistent approach. RBI, too, has made significant advances on the policy front with various committees making their recommendations on conduct of monetary policy, inclusive banking, and NPAs and the decision on new banks is also on the anvil. Were there any misses? For sure, we had a fair share of them. To begin with, industrial stagnation continued for the second successive year which is serious because if it has to be revived, a lot remains to be done. Persistent negative manufacturing growth smacks of a recession and it appears that this trade-off has been accepted. Second, capital formation has slowed down from 30.4% in FY13 to 28.5% this year. Quite clearly, stalled infra projects, inability of the government to spend, high interest rates and reluctance of the industry to invest on account of slack demand, etc, contributed to this decline in investment. The task of the new government would be to restart the investment cycle. Third, related to capital formation, savings has taken a hit due to the prevalence of slow growth in income and high food inflation. With retail inflation being close to 10% on an average basis returns on financial instruments has been negative in real terms notwithstanding RBI’s aggressive stance. Fourth, quality of assets has taken a hit, with the sum of NPAs and restructured assets crossing 10% this year. While the right sounds have emanated from Mint Street, this problem persists and would do so as long as the economy is not chirpy. RBI has also been forced to defer the Basel III implementation by a year to provide succour to the system. Fifth, while the external account looks good today, we have added sharply to our external debt which is $ 426 billion. The debt-to-forex-reserve ratio is at an all-time high of 144% and has been climbing steadily. This money has to be serviced at a higher cost. There have been some macro indicators that declined and recovered subsequently, thanks primiarily to extraneous forces; and while everyone could have played a role, it was actually nature or sentiment that drove them. The first is inflation. Onion prices went up when the crop failed and while everyone pointed fingers at everyone else, it was entirely attributable to nature when food inflation went up prodigiously. Supplies were not augmented by the government nor did high interest rates help to bring them down, but in the last couple of months, increase in supplies restored normalcy. The second is the stock market. While one does not expect rationale to drive the indices, there has been a lot of new-found enthusiasm which is linked to the outcome of the elections to be held later this month. It has been termed the clichéd irrational exuberance so far, but the elections connection does add a bit of strength to the sentiment. Last, there has been a status quo like situation in other indicators. To begin with GDP growth is expected to be marginally higher than that of last year of 4.5% and though it is a step down from the plus 7% projected at the beginning of the year, it may have a tinge of respectability. The solace is that other economies are also struggling, including China! And FII flows which turned negative ever since Ben Bernanke spoke of tapering, have started coming back; While these inflows are not in large numbers, they certainly signal a turnaround. The same holds for forex reserves which would have returned to the $290-plus level, which looked distant when things turned adverse. Are we better off or worse off than last year? This is a tough question as it means one has to rank these variables in terms of importance. However, the ultimate vindication of the overall performance is an unchanged stance of the rating agencies—which, whether we agree or don’t, matters in the international community. If our rating has not changed despite all these factors, maybe we have done right and it is time to smile.