The political battle has been convincingly won. Now, the NDA government must take on — and win — the economic challenges staring the country in its face.
The four major engines of the economy — private investment, exports, private consumption and now even public investment — have stalled or are sputtering. Irrespective of the data — not withstanding growing concerns about their credibility — the economy’s health warrants concern.
GDP growth has been slowing. The crucial automobile sector is hurting. Agricultural distress, lack of fiscal manoeuvrability, serious concerns around unemployment and a stubborn investment drought in the private sector are among a slew of challenges that the new government must tackle head on.
Politically, the Modi government will be equipped well, unencumbered by coalition or other compulsions. But it is constrained financially and not-so-buoyant tax collections. Taking charge of an economy that is facing all-round challenges, the NDA government must prioritise well.
While challenges on agriculture and job fronts require a longterm, multi-dimensional approach, the government must, as a priority, make an all-out effort to persevere with the banking reforms and do whatever it takes to stoke private sector investment. To be sure, most of these issues have been building up for a while, even though they have intensified in the recent past. The expectation is that the second Modi term, armed with a historic mandate, will have the courage to take bold decisions to tackle them.
Based on conversations with leading economists, here are the top five economic issues that the new government must prioritise:
Govt spending may kick-start the cycle
There are few economic issues more urgent for the new government than getting investment back on track, failure to do which could imperil India’s ambitious growth plans. Gross fixed capital formation, which is net investment in fixed assets as a share of the gross domestic product, was 32.3% in 2018-19, compared with 38.7% in 2012-13.
Pulapre Balakrishnan, professor of economics at Ashoka University, says public investment in areas like infrastructure and affordable housing, which necessitates demand for commodities, steel and cement, could kick-start private investment. This is crucial since exports, which also spur private investment, have not really been a bright spot of the economy.
M Govinda Rao, a former member of the economic advisory council to the PM, says private investors may have held back over the last quarter, waiting for the general election to be over.
Now that Modi’s Bharatiya Janata Party has won a majority in the general election, concerns about a coalition government have been put to rest. “A revival in the investment climate can happen only when banks are willing to lend,” he adds.
There are already signs of that. The total outstanding non-food loans (total lending minus advances to the Food Corporation of India) by scheduled commercial banks rose 12.3% between March 2018 and March 2019, the first year of double-digit growth in the past five years.
Enabling private investment would also require a more streamlined land acquisition process and faster environmental and other clearances, which clearly show the new government has its task cut out.
Stake sale will unleash animal spirits
One of the most consequential policies of the Modi government has been the Insolvency and Bankruptcy Code (IBC), 2016. The recovery rate for the 94 cases resolved through IBC till 2018-19 has been 43%, against 26.5% for such recovery mechanisms rolled out earlier, according to CRISIL Ratings. Alongside, the average time taken to resolve cases under IBC is 324 days, higher than the mandated 270 days. As of March 2019, a third of the 1,143 cases had been pending for over 270 days and in some cases even beyond 400 days.
The reasons for the delay range from litigation by promoters desperate to hold on to their companies to bidders buying time to pay up. It is widely felt that the government cannot waste time in rescuing IBC from the mess it has landed in and it must implement it in a strict and time-bound process.
M Govinda Rao, former member of economic advisory council to PM, says the government must go beyond the merger of public sector banks (PSBs) and divest its stakes. “It will allow banks to take risks. Enough taxpayer money has been used to recapitalise them.” The government infused more than Rs 1 lakh crore in PSBs in 2018-19, against the budgeted Rs 65,000 crore.
Pulapre Balakrishnan, professor of economics, Ashoka University, says recapitalisation without governance reforms amount to little. “How loans are given and how these bank heads are appointed — they need to be looked at.”
There is also the crisis in non-banking financial companies, triggered by the collapse of Infrastructure Leasing & Financial Services. NBFCs borrow short term to lend long term, creating a mismatch. And since they cannot take deposits from the public, they are dependent on banks and mutual funds for capital. The government should promptly address this issue and restore confidence among NBFCs facing a liquidity crunch. NBFC liquidity squeeze has a ripple effect on sectors such as real estate, infrastructure and SMEs.
Math has to be made farmer friendly
The farm sector employs half of India’s workforce even as its contribution to GDP has slipped to under 18%. In 2014, the NDA government aspired to double farm income. Instead, 2018-19 could be the worst for farmers’ income in almost two decades. Farmers are reeling under inflation asymmetry. Due to disinflation in farm-gate prices, they are selling their farm produce cheaper but are buying other things at higher prices. “So, the terms of trade for agriculture has become the worst since the 1960s,” says Jehangir Aziz, who heads emerging market economics at JP Morgan.
The agri sector faces serious structural challenges. Between 1970-71 and 2015-16, the number of farms have doubled to 145 million, even as average farm size has more than halved to 1.08 hectares. While India has pushed reforms in key economic sectors, agriculture remained ignored after the Green Revolution. Production rose but farm-gate prices have declined. Most policy initiatives — from minimum support price (MSP) and fertiliser subsidy to farm loan waivers — have been flawed, geographically uneven and mostly band-aid solutions. Despite last year seeing the highest MSP since 2014 and loan waivers (worth Rs 1,90,000 cr between April 2017 and early 2019), farmer protests and suicides have surged. Last November, 200 farmer groups organised protest marches, demanding better prices.
In the short term, some form of cash handouts like PM-Kisan and pensions will ease the pain. But deep structural reforms are urgent and necessary, says Abheek Barua, chief economist, HDFC Bank. Overhauling the Agricultural Produce Marketing Act, allowing direct buying from farmer producer organisations, restructuring the MSP policy and opening up market infrastructure — like warehousing, processing and logistics — are critical. A consistent and thought-through export policy factoring in perishables is important. Improving farmer capacity and productivity by upgrading rural infrastructure will be helpful. Finally, agriculture supports far too many people. Some of these people should be proactively moved to more productive sectors.
Focus on manufacturing and upskilling
India, the world’s second most populous country, with over 470 million workers, will have the world’s largest workforce by 2027 — one billion. Creating jobs is critical even as the ground reality remains grim. According to a leaked NSSO job survey data, unemployment is at a 45 year high, at 6.1%, in 2017-18. A report by Azim Premji University says 50 lakh people lost jobs in 2016-18 due to policy shocks like demonetisation and GST. The slump in the construction sector, which absorbs millions of unskilled illiterate migrant workers, hasn’t helped.
Over both the short and long term, India has a lot to worry. The job-creating manufacturing sector contributes just 18% to the GDP even as its labour intensity has been declining. In organised manufacturing, labour intensity has declined from 1.45 in the 1980s to 0.33 in the 2000s. With rising automation, this will only get worse. Even exports by labour-intensive sectors such as textiles, leather, gems and jewellery, which used to account for more than half of India’s exports 15 years ago, have been declining. Now, capital-intensive categories like engineering goods and automobiles contribute 60-70%. “Make in India has been fairly directionless,” says Madan Sabnavis, chief economist, CARE Ratings. After GST and demonetisation, SMEs are hurting, too.
The government must prioritise and incentivise manufacturing and remove policy bottlenecks while helping them become globally competitive. A small country like Bangladesh has outpaced India’s garment exports, says Sunil K Sinha, principal economist, India Ratings. Land and labour reforms, hand-holding labour-intensive SMEs, including smoothening of credit schemes like Mudra loans, are all critical. Most importantly, India must prioritise and train its youth for the new jobs that are being created.
Credibility of numbers, above all else
There is a big problem with India’s growth story — economists are unsure if the economy is expanding at the rate the government claims. For instance, questions have been raised about the revisions of GDP estimates since a new series was introduced in 2015.
These revisions marked down the rate of growth in the United Progressive Alliance years while raising the figures during the Modi years, so much so that the government said India’s GDP grew at 8.2% in 2016-17, the year of demonetisation, higher than the earlier estimate of 6.7%, confounding many an economist.
“No one who really cares about the facts trusts our short-term growth numbers. They always seem to move in the direction convenient for the government and no one outside the NITI Aayog seem to understand why the change was justified,” says Abhijit Banerjee, professor of economics at the Massachusetts Institute of Technology.
Last year, the NITI Aayog, which replaced the Planning Commission, was criticised for its role in announcing GDP data usually released by the Central Statistics Office. There are also calls for the government to be more open with its data.
“People will have to continue questioning the government,” says Rao.
It is now not uncommon for global banks, economists and investors to discount India’s growth rate or use some other metrics to get a sense of the health of the economy.
Disclosing only that data which show the government in a favourable light or resorting to methodologies which enable that will seriously harm India’s reputation. That is the last thing the new government needs.