Construction Workers, Farmers,
Industrials & Bankers:All In Dire Straits
As statistical news trickles in that the Modi
government’s classic Keynesian effort to
revive infrastructure with massive public spending ( up 19% since April), may
be working, per a Reuters report of 14th October, some of the inter-related
sectors are in deep trouble.
These include, housing and commercial construction, farming/rural
income, industry- its under-utilisation
of capacity, and banking, inadequately sized/under- capitalised, with huge NPAs.
They all have deep financial and structural problems
inherited from the previous government, but this one has not been able to make
a dent in any of them in over 16 months either.
Though the GDP has been dragged up from lows of
under 5%, mainly on account of a reduced oil bill, to around 7.3% now, finance minister Arun Jaitley’s projections
of 8 to 8.5% coming up next year, will be difficult to stabilise, let alone
work up towards double digits thereafter. Not, at any rate, without a composite
effort on several fronts. Even if a fortunate blip from infrastructure takes it
there, it is unlikely to sustain if other issues are not tackled.
Raghuram Rajan may have front loaded a recent repo
rate cut of 50 bps, putting paid to the criticism that the RBI was stymyieng
growth; but the banks have barely passed on 25 bps of it to the customer, and
that too only a selected few from amongst them.
One reason is that the public sector banks alone
(PSBs)are carrying 2.67 lakh crores in bad debt as on March 2015, up from 2.16
lakh crores in March 2014. This is as per minister of state for finance Jayant
Sinha, who reported these figures to parliament in July 2015 (Times of India,
datelined 21st July 2015). According to other reports, the NPAs are
placed even higher, at 3.02 lakh crores in March 2015, up from 2.40 lakh crores
in March 2014 (Indian Express, September 22nd, 2015).
The gross non-performing asset(NPA) ratio of PSBs
has increased to 5.43% as of March 2015, up from 4.72% a year before. This massive bad debt has also affected
profitability, though the lack of dynamism in PSBs is another factor, and the
annual return on PSB assets has come down to 0.78% in 2014-15, from 1.09% in
2010-11, per the same Indian Express report.
This has a moral dimension too, alluded to on more
than one occasion by Governor Raghuram Rajan, who is keen on pushing through a
host of banking reforms. All the bad debt in PSBs is public money, loaned out
largely to a coterie of crony capitalists under less than stringent conditions.
It is unlikely to ever come back.
To mend matters, the government needs to expedite
stake sales of PSBs to the private sector to enhance efficiency and introduce
better practices. It will also bring in fresh capital.
And of course, put teeth into both the asset
reconstruction companies (ARCs), which are too few in number, and again
woefully under capitalised, with a net worth of just Rs. 4,000 crores between
15 of them. This puny effort is meant to recover lakhs of crores of bad debt!
The bankruptcy laws too need to be made much stronger.
The RBI has been trying to help this along, but even
on the recovery side, the statistics for the ARCs, at some 31%, is far from encouraging. Governor Rajan has
publicly lamented the lack of consequence for company promoters who can get
away unscathed, despite owing thousands of crores to the PSBs as things stand.
The gaps in legislation and regulatory practice have been exploited by
influential industrialists and their political backers ruthlessly over the
years. In addition, many of the given loans flout banking norms, cautionary
notes, and so on, and smack of collusion and corruption.
Banking reforms, when, and if, they come to tackle
this daylight robbery and hold such borrowers liable, will certainly be a step
in the interests of natural justice. It will also enhance India’s fiscal
ratings and creditworthiness internationally. However, since this involves a good deal of
vested interest and is a nexus between the rich and the powerful, it remains to
be seen what will be done by the Modi administration.
But till then, the bankers are in trouble. They
cannot even cut their deposit rates in line with their intended lower lending rates. The small
savings rate, controlled by the government in post offices and the like, have
not been cut as yet. This prevents, or at any rate constrains the banks from
cutting their own savings rate, lest they earn the ire of depositors. But, overall,
the Indian banking system is broke, and therefore reluctant to lend,
compounding the catch 22 situation.
Meanwhile, the construction sector (housing/commercial
property), remains moribund, because it
can’t raise finances, at least from the Indian banks, to cover their over-leveraged
debt acquired in the boom prior to 2012.
They are finding it hard to finish long delayed projects or even service
their debt. To remedy matters, some are going
to the stock market to raise finances, and others are tapping private equity (PE) money. This is indeed working up to a point, though
at snail’s pace, because the lenders against equity stakes are hoping to make a killing when the market revives.
Ditto is the case for those privates who are building roads and other infrastructure on a PPP basis. The government is trying hard by way of offering them exits. They have lifted lock-in stipulations for completed projects; but finding buyers at appropriate prices is not proving easy.
While this may be the big picture for the people in
board rooms, the construction worker, millions of them, have had to go back to
their villages, because there is no work on the projects. And to his dismay, he
finds, there is no work on the farm either.
The rural and farm sector, involving according to a
recent Hindustan Times (HT) report, 833 million people, was living on subsidies
and high guaranteed offtake prices in
UPA II, but these have tailed off since May 2014.
This may have been done partly to curb high food
prices and inflation from this source. That has succeeded, but the farmers are
left bereft in the process. Since October 2014, rural wage growth has slowed from
a respectable 17% to about 3% currently,
according to a Hindustan Times Spotlight report datelined October 10th,
2015.
The average daily rural wage for ploughing/tilling
in May 2015, says HT, was only Rs. 272.87, just 3.3% higher than they were a
year before. This is probably because of a labour supply glut caused by the
construction and road building shut downs. And the inadequate or unseasonable
rainfall in many parts not served by irrigation has compounded matters.
Rural demand for goods and services, in the absence
of disposable income, has also tailed off, leaving most factories producing 30%
below capacity, and impacting the profitability of a host of companies ranging
from FMCG majors to two-wheeler and white goods manufacturers.
Truth is, farming and rural services just do not
need so many people, and with a 15% contribution to GDP, it is far from
lucrative. Most people there need to be employed in the urban areas, in
construction, which accounts for just as much of the GDP, and industry, even
though it needs to grow.
But with industry, construction etc. down in the
dumps, and languishing there, this just cannot happen. Modi has to move fast to
tackle these multiple problems. Oherwise the growth in GDP such as it is, will not bring any succour to
the masses who vote, and the people who have reposed faith in his promises.
For : Swarajyamag
(1,269 words)
October 15th, 2014
Gautam Mukherjee
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