Cap­i­tal­is­ing on In­dia’s macroe­co­nomic health

The com­ing year may be dif­fi­cult as oil prices, in­fla­tion and the Fed’s in­ter­est rate may rise; we should thus lever­age our po­si­tion with re­forms

Hindustan Times ST (Mumbai) - - INDIAINSPOTLIGHT -

But there are worry signs de­spite the strong macro health. Ex­ports have de­clined by more than 15% this year. The flow of bank credit, which sig­ni­fies new cap­i­tal for­ma­tion, is at a multi-year low. Fur­ther, the macro rosy pic­ture is not fully cor­rob­o­rated by the mi­cro, i.e. the eco­nomic health of firms and house­holds. Cor­po­rate quar­terly re­sults show a de­cline in rev­enues and a profit squeeze. Ru­ral house­holds are fac­ing in­put cost in­fla­tion, while ru­ral wages are al­most stag­nat­ing, caus­ing a dip in ru­ral de­mand. Two con­sec­u­tive years of drought have also led to ru­ral dis­tress in some parts.

So for long-term sus­tain­able growth we need the mi­cro and macro to weave to­gether. The mi­cro needs a se­ries of re­forms, all cap­tured by an im­prove­ment in the “ease of do­ing busi­ness”. The macro needs a big push in in­fra­struc­ture and con­struc­tion. . The big push should be redi­rected to roads, ir­ri­ga­tion, watershed de­vel­op­ment and rail­ways. There is an op­por­tu­nity for dove­tail­ing the Na­tional Ru­ral Em­ploy­ment Guar­an­tee with public works of road­ways and rail­ways or af­foresta­tion and watershed de­vel­op­ment. Sec­tors like tex­tiles can train work­ers in 45 days, and are in need of sea­sonal work­ers, mak­ing it a per­fect fit for NREGS.

The com­ing year will not be as kind and gra­cious to the macro econ­omy. Oil prices may move up. The fis­cal sit­u­a­tion will face pres­sure from pay com­mis­sion obli­ga­tions. Some in­fla­tion may inch up. Rate ac­tion by the US Fed­eral Re­serve might in­duce large panic cap­i­tal out­flows Nino ef­fects may be un­kind to agri­cul­ture. And geopo­lit­i­cal un­cer­tainty, not just in the Mid­dle East, can lead to more and sud­den dis­rup­tions.

Here are five spe­cific pol­icy is­sues that need to be ad­dressed in the near fu­ture:

On trade: We need to be vig­i­lant about the flood of im­ports, which are har­vest­ing In­dia’s high growth and con­sumer spend­ing. Can the surge of e-com­merce pro­vide the im­pe­tus to sup­pli­ers from the SME sec­tor and not just from China? Also re­mem­ber ex­ports cre­ate jobs, im­ports don’t. No sus­tained eco­nomic growth is pos­si­ble if ex­ports are de­clin­ing as they are now.

On lo­gis­tics: Al­most 70% of the goods travel by road and only 30% by rail in In­dia. This is ex­actly the op­po­site of global trends. This causes in­ef­fi­ciency, is bad for the en­vi­ron­ment and ul­ti­mately costly. Do­mes­tic lo­gis­tics costs may be as high as 15% of trans­ac­tion costs, de­creas­ing our com­pet­i­tive­ness in world mar­kets. We need to ur­gently re­verse this road-rail ra­tio in favour of rail­way for cargo.

On China im­bal­ance: Indo-china trade grew dra­mat­i­cally in the past decade. But un­for­tu­nately it is highly skewed, and now In­dia has a large bi­lat­eral deficit. To cor­rect this, we need to off­set the trade deficit with cap­i­tal in­flows from China. These can be non-dol­lar de­nom­i­nated, long-term funds into in­fra­struc­ture. It also helps China di­ver­sify away from the US dol­lar, and is thus a win-win propo­si­tion. Of course, In­dia should also aim to in­crease ex­ports in sec­tors like phar­ma­ceu­ti­cals than 100 mil­lion Chi­nese travel as over­seas tourists, but hardly 50,000 come to In­dia. Surely this can change?

On share­holder agri-prod­uct com­pa­nies: Farm­ers’ liveli­hood is an acute prob­lem Of­ten the farmer loses both dur­ing a (as prices crash). If farm­ers are or­gan­ised as a share­holder com­pany, then the com­pany can ac­cess loans, build ware­house, start value-adding down­stream busi­nesses (pro­cessed food) etc. Un­like a co­op­er­a­tive, this works in the cap­i­tal­ist model It’s time try (it is al­ready func­tion­ing sparsely in some states), with an ap­pro­pri­ate pol­icy frame­work.

On skilling: Ed­u­ca­tion is a vast and un­re­formed sec­tor. In­dia’s fu­ture growth and en­cash­ing the de­mo­graphic div­i­dend cheque depends on pro­duc­tion of hu­man cap­i­tal i.e. skilled work­force. There are al­ready many skilling ini­tia­tives, over­seen by the Na­tional Skill De­vel­op­ment Cor­po­ra­tion. Two ad­di­tional fea­tures worth im­ple­ment­ing: (a) na­tion­ally por­ta­ble ac­cred­i­ta­tion and diplo­mas, along with a na­tional ap­pren­tice­ship pol­icy. (b) a “Naukri dot com” type por­tal for ex-ser­vice­men from the armed forces. This is a cap­tive labour pool of highly trained, dis­ci­plined, ma­ture and tal­ented work­ers, but alas their set­tle­ment is only to­ward se­cu­rity agen­cies. In other coun­tries, em­ploy­ing “vet­er­ans” (as they are called) is a badge of hon­our for com­pa­nies.

This is an ex­cit­ing phase for the In­dian econ­omy. The macro is healthy, con­sumer con­fi­dence and op­ti­mism are strong. Sus­tained growth and fi­nances for so­cial de­vel­op­ment will come when the macro is cou­pled with re­forms. The journey of re­forms is never end­ing and is of a thou­sand miles. Let’s get started afresh.


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