Barclays Bank said it is positive on the Indian economy with the government making progress on economic reforms and reviving growth.
Barclays’ top executives visited New Delhi, Mumbai and Patna in the first week of October and discussed the outlook for India’s economy with officials from the Ministry of Finance (MoF) Reserve Bank of India (RBI), key cabinet ministers and policy think tanks.
“Our meetings largely reinforced our positive view of the economy. Government moving ahead with reforms Despite the recent drop in business sentiment, we believe the government remains focussed on pressing ahead with economic reforms and reviving growth,” said Barclays in its report on India.
With the fiscal tailwind remaining significant, the government is using the additional funds for infrastructure spending, especially on highways and railways, it noted.
But the biggest concern remains centred on banking system asset quality. “In this context, a sizeable part of banks’ asset quality problems are generated by losses among the power distribution companies (popularly known as discoms) and sluggishness in investment,” said Barclays in the research report.
While the government is moving forward with plans to debottleneck power and banks for credit off take, it is yet to come up with an effective strategy to raise private investment, it observed.
Despite the political gridlock in the upper house of the parliament, the government seems confident that it will be able to implement the Goods & services tax (GST) in 2016, and preparation for the new tax continues.
The government is working on the assumption of an 18-20% base GST rate. In case of any difficulty in rolling out the GST by April 2016, the government can target a later date during the year – as an indirect tax, the GST need not necessarily be implemented from the beginning of a financial year, said the report by Siddhartha Sanyal and Rahul Bajoria.
Bank recapitalisation was another key area of discussion Barclays held in India. “Most people we met said that the government’s planned capital injections in the banks is a good start, although this was still short of the banks’ long-term capital requirements,” it said.
The government’s initiative to ring fence banks in an independent bureau is also a positive step, but it will take time before this plan is operational.
Meanwhile, banks have started passing on the RBI’s recent rate cut, which some of the experts we met believe will help to improve credit demand at the margin, it noted.
The government continues to enjoy a very strong fiscal tailwind, which should ensure the fiscal deficit target of 3.9% of Gross Domestic Product (GDP) for Fiscal Year 2015-2016 is achieved.
Also, the government is using higher indirect tax revenues to fund key infrastructure spending such as highway construction and railways.
Tendering for highway projects and the pace of construction of late has been particularly noteworthy, said Barclays. This increase in public sector capex is mitigating the weakness in private investment.
“Most people in government expect the private capex cycle to remain weak, as excess capacity and subdued aggregate demand prevail, particularly in the manufacturing sector,” it said.
Several policymakers have highlighted to the bank that tackling the power sector’s problems is a priority for the government.
The government has followed a three-pronged strategy to increase power generation since last year.
Firstly, the government tackled fuel shortages (Coal India’s production has risen sharply in the past year) while key infrastructure (transportation) bottlenecks are scheduled to be removed over the next two to three years.
Second, rules for power transmission are being streamlined, which should broaden the government’s ability to supply power. The government is now moving to resolve issues in power distribution, as losses among the state discoms have been mounting.
The government continues to work on a bankruptcy code, in line with its February 2015 budget commitments, and is pressing ahead with a dispute resolution mechanism for banks and their distressed borrowers, with the setting up of commercial courts and a time-bound decision framework.
The government hopes to introduce a draft bankruptcy code before the end of the current fiscal year, it said. fii-news.com