SIX STEPS TO REVERSE THE ECONOMIC SLOWDOWN
The Indian economy is in the midst of a slowdown or, as some economists have termed it, a growth recession (where economic growth slows with every quarter). The second term may be a better descriptor of the current situation simply because what the Indian economy is going through right now feels like a recession (where growth contracts), despite there being no contraction in growth. To place it in context, it is a fact that in many lower middle-income economies like India — the per capita income of the country is around $2,000 — a slowdown in growth does feel like a recession because they have a lot of catching up to do.
There continues to be some debate on whether the slowdown is cyclical — a result of straightforward business and economic cycles; structural — because of some larger impediment or structural factor; or behavioural — generation X, for instance, buys different things and also things differently from the generations that came before it. This is considered an important question because the shape of the response to the slowdown will be decided by it. Yet, it is now becoming clear that this slowdown, the third since the global financial crisis in 2008, is all three at once — and merits the kitchen sink response (as in, you throw one at it).
Before venturing into the details, it is important to understand that not all the solutions have to, or can, come from the government. At least in some sectors, companies have to start
looking at different products or payment models. As this piece is being written on Friday, Mahindra & Mahindra has launched what seems to be a subscription model for several of its models to overcome what definitely looks like an anti-ownership bias among certain groups of consumers. There is no telling if this will work, nor intelligence on its equivalent in other businesses, but it is an interesting move. Now, for what could work.
For starters, the Reserve Bank of India (RBI) needs to cut rates sharply — not incrementally. Sure, there will be a lag effect in the transmission of this rate cut, but it will trickle down, and, if it is substantial enough, make a difference. How much is substantial? The monetary policy committee of RBI is best placed to decide on this, but a one percentage point cut would suffice.
Simultaneously, the government would do well to review laws (as well as the implementation of these) in the administrative domain of the finance ministry, which deal with income tax, goods and services tax, foreign exchange, the prevention of money laundering, and benami properties (those held under a different name or through a proxy). While it is important to penalise wrongdoers, it does seem disproportionate to have, as a lawyer told Hindustan Times recently, the same provisions for the grant of bail in fraud cases as in cases involving drug running. This paper ran an article and a series of four columns on this over the past week, and it is illuminating to understand the reality surrounding the ease of doing business in the country.
Third, although the government should be congratulated for ensuring that the crisis in shadow banking (IL&FS and Dewan Housing Finance) did not blow up, there remains unease in financial circles over the health of non-banking finance companies (NBFCs). The government did announce in the budget a partial one-time guarantee scheme that would prevent distress sales (and, therefore, panic in the markets), and allow State-owned banks to buy the assets of such companies. But there is a need to expand the scope of this scheme (although it should still remain one-time).
Fourth, while the Insolvency and Bankruptcy Code is a fundamentally reformist move, tackling the mountain of bad loans in banks requires more to be done (and done rapidly). India needs stronger, and cleaner, banks. Mergers are significant, but may not be the answer to addressing the current crisis of nonperforming assets. The idea of a bad bank isn’t new, but it probably deserves a serious rethink, if only that.
Fifth, there is clearly a problem of the middle in trade channels that needs to be addressed. This is most evident in agricultural trade, where large intermediaries have been affected, the packaged consumer goods business, and automobiles. In the second and third cases, the intermediaries (distributors, dealers, wholesale traders) have been left holding inventories even as demand slides. The middle, while an important and substantial part of the equation, is usually ignored by attempts to revive growth, which focus on producers and consumers.
Sixth, while on the subject of sentiment, the government should consider walking back the changes it introduced in the budget on the tax rates at the highest income levels.
As one ruling party lawmaker recently put it to Chanakya, “There is a feeling of tightness, of constriction.” This needs easing. This plan may seem patchwork, but it could do that.
Post-script 1: Most of these measures display a supply-side bias and are focused on the urban economy. They should not come at the cost of ignoring demand (there is a huge problem of aggregate demand) and the rural economy.
Post-script 2: There were originally seven measures. This was the seventh. While geographically limited, the government would do well to focus on delayed real estate projects in the seven largest cities in the country, which, according to an April report in Mint, aggregate at least half a million units and are worth ₹4.5 trillion. The National Capital Region and the Mumbai Metropolitan Region alone account for around 400,000 such units, worth ₹3.5 trillion. Lakhs of homebuyers and their families have been affected by this — clearly affecting sentiment, as well as purchasing power. On Saturday, the finance minister announced measures to address this, if only in part. This gives Chanakya hope that some of the other six could follow.