- Trade Now
- About Us
It will take you 3 minutes to get a comprehensive perspective on financial topics
2 related articles that add to your knowledge
One number fact that you should know
How it helps?
- Zero maintenance charges
- Zero fees for demat account opening
- Volume based brokerage
Learn the art of Investing
5 challenges for India's new government
Expectations are sky-high in the stock market if the recent rally is anything to go by. However, a lot needs to be done and it is easier said than done to fix India's economic problems.
Here are five challenges that the new government will face once elected to power:
Fiscal deficit and government spending:
Fiscal deficit is when the government's expenditure exceeds its earnings. A high fiscal deficit leads to a higher borrowing by the government. When that happens, it competes with businesses for money in the market. This keeps interest rates high and stokes inflation. The government needs money to spend. However, it needs to spend more on infrastructure and less on food, fuel and fertilizer subsidies. "In terms of per person spending, the government only spent an incremental Rs 110 on productive spending, while it spent an additional Rs 1,900+ per person on other expenditure over fiscals 2013 and 2014," according to CRISIL, a credit rating agency. The new government has to reverse this trend. It will have to cut subsidies and increase productive spending.
In the past few years, a major reason for the fall in investments and new project planning is because of lack of approvals. A new government can help clear the bottlenecks. However, a lot of this in the hands of the state governments. Even issues like land acquisition, labour laws fall under the purview of the state government, according to a report by Kotak Securities. Also, the implementation of the key Goods and Services Tax (GST) needs state cooperation. A new government could face obstacles in states ruled by the opposition. This limits the scope for economic reforms required for growth.
Transparent approval system:
The UPA government was hit by investigations in the allocation of natural resources like mobile spectrum and coal blocks. In such an environment, the new government will have to frame a transparent process of allocation. This, however, may take time, further delaying a long list of investment projects.
The Indian meteorological department has indicated that this year's monsoon may be weaker than normal. A poor monsoon could impact agricultural output and reduce rural income. This can further hit rural consumption affecting corporate earnings.
A weak monsoon also fuels inflation. This is because it hits the supply of food grains. High demand and low supply leads to an increase in prices. This leaves the Reserve Bank of India not enough room to cut interest rates. A high interest rate increases cost of borrowing for companies. This eats into profits.
Rs 1.8 lakh crore
The government has cut fiscal deficit to nearly 4.6% of the Gross Domestic Product (GDP) - a measure of the economy - from above 5% earlier. To do so, it has cut expenditure, specifically productive spending. This is the money the government spends to purchase or improve assets like equipments, buildings and so on. According to a report by Crisil, the government spent Rs 1.8 lakh crore less in productive expenditure in the last two fiscal years than was originally budget. A high productive spending has a strong correlation with a high GDP growth.