New Delhi, May 18: Celebrations over, it’s time for the Narendra Modi-government to address the key economic challenges that require urgent attention, ranging from gas price and interest rates to gold duty and mining clearances.
The first tough decision the BJP-led government will have to take will be on gas pricing. The previous government has left behind a political dynamite for the Modi government to defuse. Gas prices were sought to be hiked to over $8.40 per million British thermal units, double the current rate.
If the move — stalled by the Election Commission as part of its code of conduct — is accepted by the government, it will lead to an immediate increase in the prices of electricity and fertiliser as well as gas used in public transport and plastics, ultimately having a knock-on effect on almost all goods and services.
For a government, which will be trying to consolidate its massive mandate, any sudden price rise will be a bitter pill for the voters and can even reverse the trends in the upcoming Assembly elections in key states.
However, a status quo on prices may dampen investor sentiment in the oil and gas sector, which hasn’t seen any major discoveries in the recent past.
Moreover, Reliance Industries, which has been instrumental in seeking a price hike, has sought arbitration proceedings over the delay in implementing the new rates. If the proposal is not accepted, the new government will have a legal fight on its hands, which would also not help to build investor confidence, especially of the foreign players.
A possible way out would be a staggered hike, helping to keep prices under the lid and at the same time solving the legal tangle with the country’s largest industrial house.
Interest rate battle
If there is one demand that India Inc, which gave a rousing welcome to Narendra Modi’s victory, has on its immediate wish list, it is a cut in interest rates.
Industry has been complaining that high interest rates have blocked investments in new projects. Industry associations have been repeatedly lobbying to reduce interest rates, which they argue can drive growth. The country’s GDP grew just 4.7 per cent last fiscal after falling to a decade low of 4.5 per cent a year before.
However, RBI governor Raghuram Rajan is in favour of using high interest rates to combat inflation. The country’s consumer price inflation quickened in March for the first time in four months to 8.31 per cent from a year earlier, forcing Rajan to leave key policy rates unchanged in the last review of the monetary policy on April 1.
Speculation is rife of a battle royal between Rajan and the new government.
In the run-up to the elections, Rajan had told an audience in Switzerland that he “determine(s) the monetary policy. Ultimately, the interest rate that is set is set by me”.
In response, BJP leader Subramanian Swamy had reportedly lashed out at Rajan and his interest rate management, saying, “We need to immediately drop interest rates.”
The BJP, however, has recently indicated that it will defend the RBI’s autonomy and Rajan’s job was not at risk.
The Modi government will have to see how the monetary policy can be managed to drive growth — this could spell either the first public war over policymaking or the first successful wooing of a Congress-appointed technocrat into the BJP fold.
Gold curb effect
The previous government had increased the import duty on gold and imposed other restrictions to deal with the current account deficit (CAD), which is the difference between the inflow and outflow of foreign currency. CAD had touched $88 billion in 2012-13.
The curbs had brought down yellow metal imports significantly to $32 billion in 2013-14. However, a high duty of 10 per cent and insistence on a minimum export norm before importing gold have hit the gems and jewellery industry. Jewellery exports fell 11 per cent in 2013-14 to $35 billion after having grown at an average of 15 per cent over the last 5 years.
With Gujarat being the centre of the gems and jewellery trade, the Modi government will look to tweak the policy. However, it is expected to adopt a cautious approach and go for a staggered duty cut.
“As the new government assumes power, the sustenance of CAD at current levels remains a key challenge if it decides to do away, even so partially, with the restrictions on gold imports,” Yes Bank said in a research note.
The forced shutdown of mines on environmental grounds and the stalling of new ones by red tape have been a major cause of the slow growth.
India has one of the largest coal reserves in the world with around 293 billion tonnes of coal. However, with mining growth shrinking nearly 3 per cent in the last two years, the country was forced to import coal worth $15 billion last year.
Many say the issue of mining will be the new government’s real test.
The Modi model has long claimed that its capacity to solve problems is far greater than the long drawn-out consensus approach favoured by Manmohan Singh’s UPA government.
Roopa Kudva, MD & CEO of Crisil, said: “The lowest hanging fruits are fasttracking of projects in the pipeline and resolving iron ore and coal mining issues. This will improve the efficiency of capital that is now stuck, pave the way for better returns on investment, create jobs, lift income growth and spur private consumption demand.”
ALL EYES ON HOW FAST NEW GOVT ACTS
Issue: Gas price hike; possibly a two-fold increase
- Price of electricity and fertiliser will rise, ultimately having a cascading effect on inflation
- Investor confidence will
receive a severe blow
- Govt may get involved in a legal battle with Reliance
- A staggered hike to satisfy all
Issue: Interest rate cut
India Inc complaint
- High interest rates have frozen investment in new projects
- Reviving investment necessary to drive growth
- High inflation has forced RBI
to keep rates unchanged
- Relationship between
governor Raghuram Rajan
and Narendra Modi critical. BJP rules out interference
Issue: Easing curbs on gold imports
- Gems and jewellery
exports will get a boost
- Issue close to Modi as Gujarat is a hub of
The flip side
- Current account deficit may spike
- Govt may opt for a staggered duty cut on imports to keep deficit within limit
Issue: Reopening mines
- Red tape and environmental activism have shrunk mining activity and increased dependence on imports
- Analysts say govt needs to fast-track projects