Given the developments in the economy in the last couple of months and the political exigencies on account of the outcome of the recent state elections and the coming general elections in 2019, it is compelling to look ahead and conjecture the policy changes that may be expected.
First the issue of use of RBI reserves is to be decided once and for all. Presently the surpluses of the central bank are transferred to the central government in the form of non-tax revenue which helps the government shore up its overall revenue receipts and hence lowers the revenue deficit. A contentious issue has been the transfer of past surpluses which get into the reserves of the central bank. There has been some strong debate on this issue and it has been referred to a committee to be set up. Once done we can expect a clear policy on the reserves of the RBI. Interestingly, the idea of how the reserves can be used is a new one which has sparked controversy and hence debate. If the Committee chooses to transfer the same to the government, it will be a bonanza as these resources can be linked with several schemes that can be linked with the elections.
Second the way forward for the IBC (Insolvency and Bankruptcy Code) will be known this year. The government had brought in the IBC to address the issue of NPAs. It is not that the banks and companies have not been given a chance to resolve the same on their own. In fact they have chosen the path of kicking the can whereby they have deferred a solution by calling them restructured assets. This changed with the IBC coming in where a time bound framework has been created for resolution of these cases. Now the RBI has asked for such NPAs to be recognised on Day 1 of default and then use the 180 days clause to resolve the asset failing which it comes under the IBC. This has not found to be acceptable as it is felt that specific industries may require a different dispensation. This issue has to be resolved either which way to provide clarity for both banks and the concerned companies.
Third again within the realm of the RBI the eleven banks which are under PCA (Prompt Corrective Action) will be reviewed. Presently weak banks defined by a formula are not allowed to extend new loans and have several restrictions out in place until such time they can stand on their feet. Here the government has asked for relaxation which has again been referred to a committee which will decide on the same in 2019. This will also provide a clue to banks as to how their performance will be treated by the government and RBI. From the point of view of banking this will be a defining point.
Fourth, as a fall out of the state elections where farmer distress has been high and cited as a reason for people to vote against the ruling party there will be a tendency for farm loan waivers to be announced. This may be expected at the central and state levels. While it is accepted that loan waivers is one piece of the puzzle and cannot singularly change the status of farmers, it has to be done for the sake of the elections. There is limited fiscal space for states and the centre as the FRBM framework has to be obeyed. It will have to be seen as to how the governments manage the same. But for sure the Elections manifestoes will be full of such promises. Some of the states like MP and Chattisgarh have already announced such waivers and we may expect competitive announcements in the coming months.
Fifth, on the budget side one may expect focus on rural oriented schemes besides health and agriculture. NREGA would also be important as it has by far been the most successful employment scheme of the government which has assured an income to the participants. This has been effective for providing employment to the farmers and works well when agriculture is under pressure or between two agri seasons. Higher allocations can hence be expected at the centre level and will be within the ambit of an Interim Budget too.
Sixth, the MSP scheme has not been successful this year as farmers did not get these prices due to lack of a procurement process which exists today for only rice and wheat through the FCI. The government will focus on ensuring the same by getting the procurement machinery in place through better use of cooperatives and state agencies to ensure that there is a buyer from farmers at the MSP.
Seventh the markets will be keenly watching interest rate action. However notwithstanding changes at RBI, such a call is taken by the MPC. There are no indications of anything untoward so far with oil price being the only risk factor. With prices remaining stable, there is a good chance of CPI inflation being in the region of 4-5% in which case a rate cut can be expected during the year as this has been a demand from industry and is something the committee members have been looking at closely.
2019 will definitely be an active year from the point of view of policies. Political statements will dominate till the time of General Elections and as is usually the case, the government that is formed post elections always has zeal to start announcing and implementing its ideas in the first year. Hence for sure, there will be a lot of buzz in 2019.
No comments:
Post a Comment