The Government has its work cut out on the economic front but it will take more than just administrative action to rev up the growth engine and create more jobs

The Government has its work cut out on the economic front but it will take more than just administrative action to rev up the growth engine and create more jobs.Governments rarely do what they "should" do; they only do what they "must", making prescriptive research of little value beyond filling up newsprint and airtime. The gap between the "should" and the "would" widens further during what is the equivalent of the "middle overs" in a limited-overs cricket match. With the euphoria of the change in government behind, the next elections some time away, and the new team settled into a habit, transformational changes become more difficult, not less.It gets much harder to keep the team motivated, and with the Opposition finally regrouping around its majority in the Rajya Sabha, hard realpolitik becomes the need of the hour: the good old "saam, daam, danda, bhed" (logic, money, threat, espionage).Predictions, therefore, must necessarily be less about turning wishes into forecasts and more about figuring out what the Government thinks is important, and then what is possible. Seven months after elections, having seen two legislative sessions and one cabinet reshuffle, we can make educated guesses about the economic issues that have the Government's attention, as well as its capabilities.Given the much-reduced economic footprint of the Centre, there are only four issues under its purview that can have overall economic impact: banking, railways, coal, and the goods and services tax (GST). Issues such as the insurance bill, foreign direct investment in multibrand retail, and even the land acquisition bill amendment that are endlessly debated and seen as signs of the Government's reform credentials, have limited relevance for the broader economy. Even the Union budget is only an attempt to match largely non-discretionary expenditures with hugely cyclical revenue sources.Of the four issues that matter, clearly the GST and coal seem to have the highest priority for the Government. On the other two-banking and railways-not much of import should be expected in the coming year. For the railways, the Government, at least, seems to be seized of the problem, as evidenced by the ministerial change in October, though the scale of change needed obviates easy wins. But on banking, even the intent is unclear, particularly on implementing the P.J. Nayak Committee's recommendations on the administration of government-owned banks.Let's start with coal. The inability to pass the Coal Mines (Special Provisions) Bill in the winter session introduces further uncertainty about coal block auctions that must be completed by March. Another ordinance has been issued, so the Government can still go ahead with technical screening of applicants as scheduled and still has time to pass the bill in the budget session before financial bidding starts. However, until the ordinance becomes law, financial bidding would be unlikely. More importantly, even if the auctions were to be successful, from the perspective of coal supply, in the best case scenario we would be effectively back to where we were in early August 2014, when the Supreme Court had announced the earlier allocations as illegal. There is a significant probability, however, that the winning bidders for many blocks may not have evacuation capability for a few years and coal output may actually shrink post-auctions. Meaningful improvement in coal supply could thus be several years away.On GST, the Government's stated start target of April 1, 2016 seems aggressive given the complexity of the design and implementation. Given the Government's resolve, there is likely to be steady progress. Enactment of the law (Constitutional Amendment Bill introduced in the winter session, passage earliest by April-June 2015) would be a big achievement, but only the first step. Each subsequent step would be more complex and time-consuming. Take, for example, the complex decisions to be taken by the GST council, such as revenue neutral rate (RNR), rate slabs and place of supply rules. These decisions are likely to throw open deeper debates about the right tax rates for various goods and services, and the need to balance differentiated tax slabs with administrative simplification. Even simple developments such as exclusion of alcohol from the ambit of GST and a likely zero-rating of petroleum products can bring down the RNR from the well-publicised but poorly assessed rate of 27 per cent to 15 per cent.Implementation would start once these decisions are finalised: it will require a new and robust software system across hundreds of sites, and the system of tax filing is likely to change from entity-based filing to invoice-based filing. This phase is likely to be highly time-consuming and complex. But legislation isn't the only role of the Government; of greater importance is execution. Administrative efficiency may continue to improve as better personnel selection trickles down departments. Further, as more than 50 per cent of India's GDP is now in BJP-ruled states, the Centre can and is likely to drive several schemes in state-driven subjects. Not the least among these would be improvement in state electricity boards, as also feeder line separation and rural electrification under the now well-funded Deendayal Upadhyaya Gram Jyoti Yojana.But none of the above steps is likely to revive growth meaningfully next year. In fact, given the size and diversity of the economy, the Centre's reforms could take six to eight years to effect job creation and growth. Even the nature of growth is unlikely to change: for a population adding up to a sixth of humanity, change can never be rapid.Observers, therefore, need to look away from the Government's actions to understand where the economy is headed in the near-term.Even though anaemic compared to India's growth in the last decade, or compared to the aspirations of its citizens, a "five-point-something" growth would still put India among the world's fastest-growing economies next year. This is due to gradual but long-lasting structural changes and a very low base. Among the changes is the remarkable improvement in state-level governance over the past 15 years. This change in political parties' agenda is likely to get accelerated by the BJP's recent electoral wins on a plank of economic growth and job creation. For example, while Odisha is targeting 100 per cent rural road connectivity, Madhya Pradesh is gunning for paperless government offices.Elsewhere, the nation-wide launch of 4G services next year would be the start of India leapfrogging in broadband penetration, enabling services that can support growth. Even the millions of bank accounts created under the Pradhan Mantri Jan-Dhan Yojana provide a large platform that can enable several new productivity-enhancing services. There has also been the dramatic, nearly four-fold increase in intake capacity in engineering colleges in India over the past seven years. Many bemoan the quality of these engineers, but such a rapid expansion in training infrastructure is itself creditworthy.There are likely to be many more important developments in the new year completely unrelated to the Central government, not least the negative impact of a global growth slowdown, further monetary easing by central bankers globally fearing deflation that will likely boost asset prices and a continued stock market rally, and a new GDP series that is likely to bump up the estimated size of our economy by at least 10 per cent (suggesting that we have been growing at least 1-1.5 percentage points a year, faster than reported in the last decade). Holding your breath for the Government to excite you about the economy is therefore not a good idea-that change will neither be easy nor immediate.Neelkanth Mishra is head, Equity Strategy India, Credit Suisse.Published By: AtMigration Published On: Jan 2, 2015 00:13 IST--- ENDS ---

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The Government has its work cut out on the economic front but it will take more than just administrative action to rev up the growth engine and create more jobs

The Government has its work cut out on the economic front but it will take more than just administrative action to rev up the growth engine and create more jobs.

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