The overall economic resiliency of India as measured by economic and institutional strengths has gone up by one notch from H- to H. While a large and growing economy, inflation targeting and control has helped the overall score, institutional development indices are still not improving as fast as desired.

Fiscal Strength – Need To Improve Tax Base And Compliance

The fiscal strength of the country is measured by four sub-factors - the debt and consequent interest burden vis-a-vis the GDP and revenue of the country. The performance of India in all of three of these four sub-factors is in the low to very low range. Not surprisingly, the fiscal performance pulls down the economic performance leading to the government financial strength moving towards the medium category from high only based on economic strength. The debt burden as on date is perhaps a legacy issue and a combination of many issues such as the need to stimulate the economy through public spending, laxity of fiscal compliance and lackadaisical approach towards tax collection.

The avowed improvement in the tax base and compliance driven by tax reforms and better data analysis can perhaps help improve the cosmetics of this ratio in the medium term. But in the longer run unless there a disciplined approach towards debt is in place this can be a constant quagmire. In a federal multi-party structure, the discipline of the various states in enforcing their FRBM commitments will be critical. Nevertheless, the governments (both Centre and state) can target some of the following recurring obvious problems in a holistic manner.

1. Power sector leakages (While UDAY is expected to address some of the distribution level issues, perhaps the elephant in the room is the transmission losses which are considered as high as distribution losses)

2. Subsidies and adhoc write offs – The direct bank transfer (DBT) for many schemes has reportedly brought down subsidies. The fertiliser subsidy DBT is still not done at an all India level and perhaps can significantly help reduce the fiscal burden. Another policy intervention that periodically upsets the fiscal math is the farm sector write-offs. Technically, given the political setup, there are no solutions although farm insurance to some extent addresses this vagary.

3. Pay commission payouts – It is a recurring problem that throws the fiscal deficit awry once in few years. Creation of a regular allocation in a sinking fund can perhaps help partially address this issue.

4. Ease of tax payment and redressal – This is a systemic issue and has made many improvements in the last few years, at least for individual tax payers. Nevertheless, a quick redressal and closure mechanism can help in better productivity of the fiscal establishment.

Susceptibility To Event Risk –Banking Sector The Biggest Drag

The event risk covers political risk, liquidity risk, banking sector risk and external vulnerability risk. The political risk may not change significantly in the short to medium term as the current setup is expected to continue for the next 18 -20 months at least and has the numbers to push through tough reforms if they choose to. The liquidity risk is again perhaps within agreeable boundaries given that the dependence on external debt and the robust foreign exchange reserves that can more than cover the repayments if need be. Similarly the position of the country on the external vulnerability index is quite high.

The banking sector risk measured by ratios such as total banking sector assets to GDP at 89 per cent and the loan to deposit ratio of banks at 73 per cent indicate a well percolated banking system with an active lending traction. But what perhaps spoils this indicator is the average baseline credit assessment of the banks at Ba2 indicating the inherent weak asset quality. The recent recapitalisation has specifically been pointed out as a specific positive in the analysis by Moody’s. But a sustainable improvement on this front necessitates a strong credit appraisal process devoid of political and other pressures. The recent policy initiatives by the government to help close bad loans and realise value is a step in the right direction although a stronger appraisal process can help avoid the periodic rearing of this problem like the pay commission issue. Also, the recapitalisation through a cosmetic accounting mechanism can address the symptom rather than the cause.

It is intuitive for the government to perhaps focus on controllable factors such as borrowing, tax reforms and compliance to ensure a steady improvement on the rating scale. Other linked factors may automatically be better. The complex factors on governance and prevention of corruption will be combination of government will and public awareness in a vibrant democracy like India.

How Does India Compare With Peers