New govt must focus swiftly on growth recovery
The prolonged phase of low inflation is symptomatic of a demand slowdown. This means manufacturers lose their pricing power, which worsens the investment sentiment that is already weak. It has a direct bearing on job creation.
The main task before the next government is to work towards growth recovery from the word “go”. While growth did improve to over eight per cent from the lows five some years back, and thereby enhanced India’s status as a growth leader in the global economy, it has since been scaled back. This is quite apparent in the slowdown of consumer spending, be it the fall in automobile sales or lower volumes of FMCG products being sold in the market or slower growth in consumer durables.
The current government has taken big steps in improving the average standard of living, where there has been a bottomup approach aimed at solidifying the base, and also expanding it. This can be seen the successful financial inclusion programme of Jan Dhan Yojana that gave lower income households access to banking products. While the number of
account holders has gone up threefold since it was introduced, the deposits in these accounts have expanded tenfold, thus showing that existing depositors are regularly adding to their balances.
Other notable schemes like Swachchh Bharat, Ayushman Bharat, Ujjwala, Smart Cities, etc, were launched with varied results. What is required is a renewed focus on implementation of these and other similar schemes.
While the government has been able to keep inflation under control, this phase of low inflation is now prolonged, which is also symptomatic of a demand slowdown. This also means manufacturers lose their pricing power, which would only worsen the investment sentiment that is already weak. This has a direct bearing on job creation and the associated impact on spending and growth. This remains an issue as we do not have a proper estimate of the jobs created in the economy. Jobs in the organised sector as well as a big part of service sector jobs, a sector that contributes almost threefifths of our GDP, are not being adequately collated, thus hampering affirmative policy actions on the employment front. With transformative changes in the form of Artificial Intelligence, the Internet of Things and robotics changing the face of businesses and even daily life, the skill sets should be aligned accordingly with a considerable overhaul in the education curriculum. More than half the children who are going to school now will work in jobs that do not yet exist.
The Indian economy must become more competitive. The current government had laid a great emphasis on Ease of Doing Business (EoDB). This is evident in the big strides India has taken in World Bank’s EoDB rankings, where it has moved up significantly by 65 places to 77th in 2019. The higher ranks in EoDB would matter little if we are unable to compete on an even footing. India is still not the easiest place to do business as the absence of proper alignment of laws leads to higher compliance costs. India needs certainty in policy to keep investment stability. Also, the proposed reforms in the areas of labour, land acquisition, etc, are almost at standstill, which needs to be addressed at once. What is essentially required is the simplification of rules and regulations, as well as establishment of clear, well conceived, and comprehensive standard operating procedures on each issue that would go a long way to improve the situation. For example, the current government made a positive start by combining around 44 labour laws into four specific codes. With the basic template in place, the next government should take this further. Alternative modes of land acquisition like land pooling and land consolidation should be encouraged. There is also a need for empowerment of officials, who must be held accountable for specific targets.
GST, one of the major reforms undertaken so far, has more or less stabilised by now, with collections gradually reaching the targeted levels. This should set the stage for more reduction in rates and slabs in future. At the same time, efforts must continue to further expand the tax base, including individual taxpayers, in order to provide headroom for more productive government expenditure.
The incumbent government had also laid a big emphasis on reducing the infrastructure deficit, particularly roads and ports, with renewed emphasis on waterways after a long gap. But apart from roads, progress on other fronts has been slow. The next government, therefore, needs to fast-track the process of project clearances and expedite matters pertaining to the clearance and land acquisition for industrial purposes. Work on the Dedicated Rail Freight Corridors also needs to be accelerated. This will go a long way to improve our competitiveness.
While the low inflation provided headroom for RBI to maintain an accommodative monetary policy leading to rate cuts of late, but banks’ rate transmission is lower as they forced to make big provisions for NPAs, besides other legacy issues. As such, real interest rates in India continue to remain high in India, by at least 250-300 bps higher than other emerging market peers. The next government must look into injecting more capital into public sector banks through recapitalisation which will provide headroom for future bank lending. To make the RBI’s rate cuts more effective, it is important that banks continue to make more recoveries under IBC, which is maintaining good progress. For this to persist, the government must ensure that resource needs under IBC be strengthened (judges in NCLT, staff, etc) and not much dilution in the IBC norms.
The prolonged food disinflation has affected farm incomes that have led to the current agrarian distress and kept rural demand sluggish. Agriculture remains vital for the overall economic well being and thus needs special attention to address the structural issues that continue to plague it. The government’s actions must be guided by the aim of making agriculture more productive and increasing farmer’s income. Besides the impetus on better irrigation techniques and investments in rural infrastructure, there is a need to enhance crop yields through greater dissemination of information related to higher yield crop varieties, soil quality, flood and drought resistant seeds, etc. enabling farmers to make informed decisions.
Higher MSPs, as has been proved, is no solution, unless it is supported by adequate procurement, which unfortunately remains low. Also assured procurement in few crops leads to more focus in those areas (foodgrains) when the focus should be more on horticulture, where production has exceeded those of foodgrains for the sixth consecutive year. Capacity creation amongst farmers (silos for grain storage, coldstorage facilities) as well as modernisation of agri-storage warehouses should be encouraged to improve efficiency and reduce losses. Another effective measure would be direct income support to farmers as introduced in the Interim Budget. While the amount is not enough, this can be enhanced if there is a substantial rationalisation of the existing subsidies (food, fertilizer, etc). Removal/rationalisation of wasteful subsidies would make cropping patterns become more competitive and help to further improve productivity. This, in turn, will give a boost to our agri trade.
If we look back from where we started with the current government, a lot of things have changed for the better. At the same time, there are some aspects where after a promising start, progress have stalled. The onus is on the next government is to put the wheels into motion again so that the economy rides back on the growth path sooner.