Re­boot the Job Ma­chine

Govt must push struc­tural re­forms to lift the econ­omy that has taken a hit due to de­mon­eti­sa­tion

The Economic Times - - The Edit Page - Ajay Ch­hib­ber

The Bud­get is not just a fis­cal state­ment but sends sig­nals on the di­rec­tion of eco­nomic pol­icy. Modi Sarkar’s first real bud­get for 2015-16 (its bud­get for 2014-15 was just a han­dover from the UPA govern­ment) raised hopes on the pol­icy front as it promised a growth-ori­ented in­clu­sive set of pol­icy mea­sures ti­tled “Sabka Saath Sabka Vikas”.

It sig­nalled an in­tent to trans­form In­dia as it fo­cused on infrastructure spend­ing, cre­ated the Na­tional In­vest­ment and Infrastructure Fund (NIIF) and in­tro­duced a new bank­ruptcy law. The govern­ment also ac­cepted the Fi­nance Com­mis­sion’s rec­om­men­da­tion to de­volve more funds to states and promised im­prove­ments in the ease of do­ing busi­ness while in­tro­duc­ing new univer­sal so­cial se­cu­rity pro­grammes for the poor and el­derly. It was a bud­get whose un­der­ly­ing phi­los­o­phy was hand-ups not hand-outs.

It looked like Modi Sarkar would get the In­dian back on track af­ter the dis­as­trous last two years of the UPA govern­ment. In­dia started to look at­trac­tive and be­came the talk of the world. A re­vised (but ques­tion­able) GDP se­ries, an­nounced with much chest-thump­ing lifted In­dia’s growth rate to 7.5%, faster than China’s.

How­ever, with the loss in the Bi­har elec­tion which fol­lowed the ear- lier loss in the Delhi assem­bly polls, the Modi govern­ment lost its brash con­fi­dence. Modi de­scribed re­forms as a marathon not a sprint. In­cre­men­tal­ism be­came the mantra, with an ad­mis­sion that bold re­forms were not pos­si­ble un­less there was a full blown eco­nomic cri­sis. A staid but steady bud­get was pre­sented for 2016-17. Mean­while, job growth and pri­vate in­vest­ment slumped.

A GST Bill was fi­nally shep­herded through Par­lia­ment. De­spite its many com­pro­mises and com­plex­ity, in­ter­na­tional in­vestors saw this as a pos­i­tive sig­nal.

A Dis­rup­tive Re­form

Then like a thun­der­bolt from God In­dra, Modi un­leashed an ill-thought-through de­mon­eti­sa­tion to un­earth black money and curb cor­rup­tion. He railed against the rich and sold de­mon­eti­sa­tion as a fight for the poor akin to Indira Gandhi’s bank na­tion­al­i­sa­tion and abol­ish­ment of privy purses un­der the slo­gan “Garibi Hatao”.

The Bud­get calls de­mon­eti­sa­tion a “dis­rup­tive re­form” with­out giv­ing us any cal­cu­lus on whether it achieved any of its ob­jec­tives. The fore­cast growth for the cur­rent fis­cal year (2016-17) orig­i­nally stood at 7.6 % — but is now pro­jected post de­mon­eti­sa­tion to be around 6.5-6.75 % — a drop of around 1%. In­stead of mea­sures to boost re­cov­ery, the Bud­get pro­vides small sops to some groups who are likely to have been af­fected ad­versely by de­mon­eti­sa­tion — tax re­lief for low-in­come tax­pay­ers and smaller com­pa­nies and in­creased al­lo­ca­tion to Ma­hatma Gandhi Na­tional Ru­ral Em­ploy­ment Guar­an­tee Act to help dole out more cash in ru­ral ar­eas.

Fis­cal 2016-17 and 2017-18 may well go down as two wasted years for In­dia. In 2016-17 pa­tiently cop­ing with de­mon­eti­sa­tion and in the com­ing fis­cal try­ing to re­cover from its im­pact. Non-per­form­ing loans (NPL) are es­ti­mated to be as high as $191 bil­lion (8% of GDP). The Bud­get pro­vides .₹ 10,000 crore for re­cap­i­tal­is­ing pub­lic sec­tor banks. The NPLs are likely to grow many times that in the com­ing year.

The pro­posed 2017-18 Bud­get breaches the an­nounced fis­cal path from 3 to 3.2% of GDP, but prom­ises to get back to the fis­cal path next year, in or­der to avoid a down­grade. We will also not be sure un­til much later whether the fis­cal deficit tar­get of 3.5% of GDP for 2016-17 has been met.

‘Bi­ased Rat­ing’

The eco­nomic sur­vey takes on the rat­ing agen­cies for be­ing bi­ased against In­dia with its credit rat­ing kept at BBB-, ver­sus the upgrade for China from A+ to AA-. But with de­clin­ing pri­vate in­vest­ment, ris­ing NPLs and un­cer­tainty cre­ated by de­mon­eti­sa­tion, it is not sur­pris­ing that rat­ing agen­cies have adopted a wait-and-watch at­ti­tude on In­dia.

The pre­vi­ous NDA govern­ment lost the 2004 elec­tion on its “In­dia Shin­ing” cam­paign while ig­nor­ing the poor and ru­ral ar­eas. Modi Sarkar was sen­si­tive to be­ing la­beled a “Suit Boot Ki Sarkar”. It has pressed a re­set but­ton and shifted back to in­creas­ing hand-outs. It has made anti-cor­rup­tion a class war for the poor against the rich. But the hamhanded way in which it im­ple­mented de­mon­eti­sa­tion may have hurt the poor far more than the rich — if it hurt them at all.

Modi pop­u­lar­ity’s has risen af­ter he has shifted to be­com­ing a cru­sader against the rich. But like Indira Gandhi’s, it may be tem­po­rary. This re­set may help BJP score well in the up­com­ing state elec­tions. But even if it does, his­tory tells us it will not last un­less gen­uine job-cre­at­ing re­forms are un­der­taken.

In­dia may now have to wait un­til af­ter the 2019 gen­eral elec­tion for a gen­uinely re­form-minded bud­get. In the mean­time, we can only hope that the grow­ing NPL prob­lem does not be­come a full-blown bank­ing cri­sis. But if it does, per­haps then and only then will we see gen­uine re­forms that In­dia badly needs to get ‘Sabka Saath Sabka Vikas’. In the mean­time, no more thun­der­bolts please.

The writer is dis­tin­guished, vis­it­ing pro­fes­sor, Na­tional In­sti­tute for Pub­lic Fi­nance and Pol­icy

Please take note, and re­form

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