Year End Specials: GST roll-out, 2G verdict, closure on IBC, and more

Here is a look back on the major events in economy and policy

India’s tryst with GST

On the stroke of the midnight hour on July 1, the Goods and Services Tax (GST), India’s biggest indirect tax reform, came into being in an elaborate ceremony in Parliament, boycotted by the Congress party. But with a challenging deadline to implement a national integrated taxation system that included five slabs, nearly 40 exemptions and seven cesses, the goal of One Nation One Tax degenerated into multiple confusions. With economic growth hit and trader unrest growing, a five-member Group of Ministers was set up in September under Bihar Deputy Chief Minister Sushil Modi to monitor technology glitches. In November, the GST Council, slashed taxes for over 200 items and raised the entry threshold to Rs 1.5 crore. These moves have tamped down the unrest. But the impact on 2017-18 tax revenues remains an open question.  

Growing pains
 

 

The queues in front of the banks vanished, but as the trauma of the 2016 demonetisation faded from public memory, its impact showed up in the GDP print. Growth slipped to 6.1 per cent in the last quarter of 2016-17 (see chart). Excluding agriculture and government spending, the economy grew by a mere 3.8 per cent, signalling the extent of the disruption. Many hoped that as remonetisation gathered steam, the economy would bounce back. As the deadline for the introduction of the Goods and Services Tax approached faster than expected, companies cut back production. Growth slid further to 5.7 per cent in the first quarter of 2017-18, with manufacturing slumping to 1.2 per cent. Since then, the economy appears to have bounced back as companies ramped up production in anticipation of festive demand. But the jury is out on whether this uptick can be sustained.
 

Scandal without a crime

From left: Former telecom minister A Raja and DMK MP Kanimozhi after they were acquitted in the 2G scam case in New Delhi. Photos: Reuters

 

Eight years after the scandal erupted over a report by the Comptroller and Auditor General alleging humongous losses and shenanigans in the allocation of 122 licences for 2G spectrum, the special judge hearing the case filed by the Central Bureau of Investigation (CBI) in October 2009 acquitted all 17 accused for lack of evidence. This included former telecom minister A Raja, Dravida Munnetra Kazhagam MP Kanimozhi, 13 businessmen and several bureaucrats. In a remarkable judgement that has come as a major reprieve for the Congress , the special judge O P Saini castigated the CBI and the special public prosecutor for conducting a “directionless and diffident” prosecution that threw up no hard evidence. Where this verdict leaves the Supreme Court’s dramatic cancellation of licences in 2012 after declaring the allocation as “unconstitutional and arbitrary” is now an open question. Expect multiple appeals from investigative agencies and cases against the government by aggrieved companies in 2018.

Labouring over jobs
 

 

Prime Minister Narendra Modi’s promise of creating 10 million jobs came in for sharp scrutiny when India’s economic growth started decelerating from April 2016 onwards. This year saw the full disruptive impact of demonetisation and the rushed deadline for introducing the Goods and Services Tax. There is now a growing disquiet about the lack of adequate job creation in the economy. The problem is two-fold. One, the lack of good quality, comparable and timely data. Two, even the existing sources — be it the Labour Bureau’s Annual Household Employment survey (last available for 2015-16), or the Annual Survey of Industries (last available for 2014-15), or the NSSO’s latest “Unincorporated Non-Agricultural Enterprises” (for 2015-16) — either show a decline in job creation or an insignificant increase. Much now rides on the government’s proposed National Employment Policy, due to be unveiled in the coming Budget.

Crude concerns

 

The agenda for the oil sector was set with the Organisation of Petroleum Exporting Countries deciding to cut crude oil output by 1.2 million barrels per day (mbd) from January 2017 to maintain a production cap of 32.5 mbd, the first such cut in eight years. This and supply disruptions caused the global benchmark Brent crude to cross $65 a barrel in December, for the first time since 2015, an increase of over $10 over the previous year. Since this price jump is not an outcome of increase in demand, most analysts do not see prices touching new highs in 2018. For the Indian government, which has been enjoying the double benefit of increased tax on petrol and diesel and a lower subsidy burden, any further increase will be a cause of worry.

Doing Business: A long jump
 

 

After years of languishing in the middle, India moved up 30 ranks in the World Bank’s annual “Ease of Doing Business” rankings from 130 to 100. Three parameters were responsible: protecting minority shareholders (from 13 to 4); paying taxes (172 to 119); and resolving insolvency (136 to 103). This ranking did not include the impact of the Goods & Service Tax (GST), since the cut-off for the ranking was June 1, a month before GST was introduced. Never mind the problems traders and companies are facing now, Finance Minister Arun Jaitley thinks India will vault up the rankings once GST is factored in. Meanwhile, the government is focused on breaking into the top 50 by focusing on areas such as enforcing contracts (current rank: 164) and dealing with construction permits (181). Despite the doubters, Prime Minister Narendra Modi has pronounced this target “doable”.

Capital solution

Photo: Kamlesh Pednekar

 

This year saw the government finally bite the bullet on the long-pending issue of public sector bank recapitalisation when it announced a Rs 2.11 lakh crore plan. The rising non-performing assets in state-owned banks had over the years stripped most banks of their profits as well as their ability to lend further — credit growth touched the lowest in 25 years. The government was stuck with a tough choice: privatise some of the worst performing banks or boost their capital base so that they could get back to financing fresh economic activity. The former was a political minefield but the latter, too, was not without its downsides. With close to Rs 76,000  crore coming straight out of the central coffers, the focus now is on figuring out the best way to allocate fresh capital. But the more enduring worry is about improving the weak governance in public sector banks that got them into this mess in the first place.

Closure on IBC

 

For the longest time, the only thing worse than starting a business in India was trying to close it down. In 2016, the government put in place the Insolvency and Bankruptcy Code, which laid down the process to wind up bankrupt firms in a swift and timely manner while also ensuring that productive assets do not go to waste. This year saw the IBC being put to actual use but the first few cases showed that failed original promoters were wresting back the control of their firms even as the lenders took massive haircuts. Not only were the optics unacceptable, this possibility raised concerns of other promoters gaming the system going forward. That’s why the government brought in an Ordinance amending the Code in November and effectively ruled out promoters from bidding for their firms. Clearly, the IBC is a work in progress but its efficacy would be central to the economy moving ahead in 2018.

Moody’s swing

 

Narendra Modi’s government may be facing flak for slowing growth and growing unemployment, but credit rating agency Moody’s Investor Service expressed confidence in his stewardship of the economy by upgrading India’s sovereign rating from the lowest investment grade, Baa3, to Baa2, and changed the investment outlook from stable to positive. This marks the first investment upgrade in 14 years. A week later, however, Standard & Poor’s begged to differ, holding its rating at the lowest investment grade of BBB- with a stable outlook on account of concerns over the fiscal deficit, government debt and lower per capita income. In May, Fitch had also kept its rating of 11 years unchanged at BBB-, a notch above junk bonds.

Electric shocks
 

 

In March, then minister for power Piyush Goyal announced that the government was considering the possibility of converting the Indian automobile market into an all-electric vehicle market by 2030. No auto-maker took him seriously until the Goods and Services Tax announced that electric vehicles would be taxed at 12 per cent compared with 29 per cent on cars and other vehicles and hybrid cars at a steep 43 per cent. The policy disincentive for conventional cars is clear but in the absence of supporting infrastructure, such as charging stations, and the costs of the new technology, some traditional players like Mahindra & Mahindra and Suzuki have made moves in that direction and several start-ups have plugged into the opportunities driving this new market.

Air India up for sale — again  

 

After almost a decade of struggles and a $ 4.5-billion bailout in 2012 to turn it around, the government in June announced an “in-principle” decision to sell loss-making state-owned airline Air India. The target date is June 2018. The plan chalked out by a group of ministers led by Finance Minister Arun Jaitley is to sell Air India and its low-cost subsidiary Air India Express together. To maximise valuation, separate bids would be invited for the ground-handling subsidiary and the maintenance, repair and overhaul (MRO) units. So far, low-cost airline and market leader IndiGo Airlines has formally expressed interest in the passenger airline, Turkey’s Celebi Aviation and Delhi-based Bird Group in the ground-handling arm, and Airworks, the country’s oldest private MRO firm, in the MRO. This is not the first attempt to sell Air India — previous efforts ended for lack of interested buyers.