MUCH TO CELEBRATE, MUCH TO ACHIEVE
The report card on the completion of three years of the government led by Prime Minister Modi says “glass more than half full”. This is not only this author’s assessment, but also reflected in various surveys and polls.
The thumping electoral mandate of voters of Uttar Pradesh after the demonetization is a case in point. The record inflow of foreign direct investment as a vote of confidence from foreign investors is another example. An online national survey conducted by Local Circles shows two-thirds of the respondents saying that the government has exceeded or met their expectations. Considering the already high bar set for expectations for the Modi government, this is no mean feat.
On the macro front there is indeed much cause for celebration. Inflation is down below 5 per cent, from about 13 per cent three years ago. The exchange rate is stable, and was one of the best global performers this past year. Foreign inflows are at record highs. The stock market has climbed new peaks. The twin deficits of fiscal and trade account are well within comfort levels. Indeed, the fiscal deficit has been kept in check despite the need for massive infusion of public funds into infrastructure and recapitalizing banks.
On the economic policy front, too, there are many achievements. The much-awaited Goods and Services Tax (GST) will roll out in a month’s time. Its legislative passage in Parliament and subsequently in all state legislatures is a triumph of cooperative federalism. The GST council has finalized rates and slabs, and although the proliferation of multiple rates is less than optimal, it is a significant step forward.
The linkage of Aadhaar to various government schemes has resulted in substantial savings and reduction in leakage. The passage of a new bankruptcy law and a new ordinance to tackle the crisis of bad loans (Non-Performing Assets, NPAs) will hopefully help banks to show healthy credit growth again. Post demonetization almost one crore new potential taxpayers have been identified. This will greatly widen the tax net and increase tax compliance. India has one of the lowest tax to GDP ratios in the world, and any measure which increases tax collection without raising rates or coercion is welcome.
The policy to nurse sick electricity distribution companies back to health, called UDAY, is to be commended. India’s performance in the electricity sector has been stellar, and the country’s rank in the ease of access to electricity jumped from 99 to 26. This is a component of the overall ease of doing business.
So what are the glass half-empty pointers? Firstly, private investment spending is still anaemic. Private corporations are reeling under high debt, excess capacity and the threat of cheap imports made worse by a strengthening rupee. Their “animal spirits” to build new projects and factories should be unleashed. The large public sector spending on infrastructure will hopefully crowd in, rather than crowd out private investment.
Secondly, banks need to revive credit growth. No doubt they are constrained by NPAs, but sustained economic growth is not possible without high credit growth. Thirdly, and most importantly, is the spectre of jobless growth. The eight key sectors tracked by the Labour Bureau show that only 2.3 lakh jobs were added in those sectors in 2016 as against 10 lakhs seven years ago. The IT industry says more than 2 lakh workers will lose jobs this year. It’s not just because of H1B visa problems and protectionism in the USA, but also because of automation. The World Bank says that 69 per cent of industrial jobs in India are under threat of losing out to automation.
Ironically, we have economy growing at 7 plus per cent, and a simultaneous coexistence of jobs and skills shortage. This is the main challenge that must be tackled by the Modi government in the near future. Else unbridled joblessness can manifest in an ugly manner causing social tensions and worse. If there is a mismatch between what skills the industry is looking for, and talent coming out of institutes and colleges, it calls for urgent curriculum overhaul. New skills development among low-income youth is not a profitable venture, since high fees cannot be charged. Hence this requires public funding. That training subsidy will more than pay for itself by the creation of a productive, skilled workforce, most of whom will be high income earners and taxpayers. India needs a million new jobs every month for the next twenty years. But these will be created by small and micro enterprises. So we also need creation of 50,000 new enterprises every month. That is directly related to ease of setting up a new business, getting access to capital, talent, markets, connectivity and electricity. Thus jobs and ease of entry of entrepreneurs should be a big priority in the coming years.