DIAGNOSE THE AILMENT BEFORE YOU TREAT IT

No medicine can cure a patient if the diagnosis of the ailment is flawed. Indeed, sometimes, it might aggravate the patient’s condition.The logic is no different when it comes to fixing the health of an economy.

For the past few weeks, the slowdown of the Indian economy has made headlines, forcing the government to consider a revival plan. According to news reports, ministries have been asked to identify sector-specific issues and suggest remedies. Finance minister Arun Jaitley has said we will hear more on this soon.

The growth of the broader economy, as we all know, has slowed to a fouryear low because of weakening consumption demand and a near stalling of investment. Much of this deterioration in the recent quarters has been blamed on demonetisation and the bumpy rollout of the goods and services tax, but it is important to ask what made the economy so vulnerable to these twin disruptions. Because therein lie the answers to a sustainable recovery from the current economic morass.

A scrutiny of the Index of Industrial Production for the past five years, 201213 to 2016-17, reveals how the present government might have failed to rectify structural weaknesses in some key sectors that it inherited from the previous regime. Over these five years, only three of the 23 sub-groups in manufacturing grew at a double-digit pace annually, while growth either decelerated or stayed sluggish in as many as 16 sub-groups that included such key jobs-generating sectors as basic metals, machinery and equipment, electronics and automobiles. Three sectors, including manufactured food and wood products, contracted.

For most sectors, the data shows, that the decline began in the terminal years of the UPA government and wor- sened over the past three years of the NDA rule. In fact, the number of subgroups that contracted or saw no growth rose to seven in the last three years. From slackening demand in the export market and rising costs of inputs and finance to lingering policy hurdles, the reasons for underperformance vary from sector to sector.

Pushing the Reserve Bank of India to reduce interest rates or the government trying to spend its way out of trouble can at best bring temporary relief to these ailing segments of the economy. But a lasting solution will require a combination of carefully designed short term and long-term policy interventions that will ease demand constraint and resolve supplyside bottlenecks.

For the longer term, the banking system has to square its books; the government will have to spend a lot more on infrastructure, education and health; policymakers must recognise that the distress is far worse in rural India; and above all, it will be important that the country has a stable socio- political climate.

Data shows the ruling party’s political beliefs might have hurt the economy in more ways than one. The state of the leather export industry is a case in point as production at tanneries in Uttar Pradesh fell by almost half in the wake of the campaign against cow slaughter and growing incidents of cow vigilantism.

That said, the game could be won or lost over what the government does in the short term.

It must move quickly to assuage the pain from GST – especially the small and medium enterprises that drive generation of jobs and exports, but have not been cared for. A way has to be found to ease credit flow to this sector. Also, the government and regulators must stay vigilant over the recent surge in the stock market that belies the state of the real economy and risks wealth destruction, especially of the middle class investor, should the bubble burst.

But the most critical short term imperative is to restore confidence among businesses, which have increasingly grown wary of policy surprises and shocks. Besides, weak demand and lack of easy finance, the fear of policy uncertainties has discouraged private investment. It is time the government committed itself to policy stability.

THE MOST CRITICAL SHORT TERM IMPERATIVE IS TO RESTORE CONFIDENCE AMONG BUSINESSES, WHICH HAVE GROWN WARY OF POLICY SURPRISES AND SHOCKS