ANIL PAD­MAN­AB­HAN

FROM POL­ICY PARAL­Y­SIS TO IN­VEST­MENT PARAL­Y­SIS

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Last week Prime Min­is­ter Naren­dra Modi joined the on­go­ing rhetor­i­cal de­bate on the state of the In­dian econ­omy with a strong de­fence of his govern­ment’s ac­tions over the last three years. Among other things, his in­ter­ven­tion put the spot­light on the econ­omy— some­thing long over­due, but not for the rhetor­i­cal charges that are be­ing flung around on both sides.

If in­deed there is a pithy way of sum­ma­riz­ing the state of af­fairs suf­fice to say that the coun­try’s econ­omy has tran­si­tioned from a state of pol­icy paral­y­sis (which iden­ti­fied the Con­gress-led United Pro­gres­sive Al­liance or UPA) to one of in­vest­ment paral­y­sis. Both are cause for worry but for en­tirely dif­fer­ent rea­sons. One was the out­come of a govern­ment which, for what­ever rea­sons, went into a pol­icy funk with dis­as­trous con­se­quences.

The other is the re­sult of struc­tural dis­rup­tions—some of which, like spi­ralling bad debts with banks, are a le­gacy of the UPA regime and a few in­duced by pol­icy changes, like the rollout of the goods and ser­vices tax (GST) and de­mon­e­ti­za­tion of high value cur­ren­cies, un­der­taken over the last three years.

So while one arose from in­ac­tion, the other is largely a fall­out of not an­tic­i­pat­ing or re­act­ing in time to ad­dress the dis­rup­tions aris­ing from hit­ting the re­set but­ton on the econ­omy. It is im­por­tant to grasp this dis­tinc­tion. Al­ter­na­tively, there is a risk of be­ing over­whelmed by the rhetor­i­cal claims and coun­ter­claims on the econ­omy; and miss­ing the woods for the trees as it were.

As such the econ­omy is not do­ing as badly as the op­po­si­tion is claim­ing—es­pe­cially with al­most ev­ery agency fore­cast­ing a re­bound in eco­nomic growth, al­beit mar­ginal, in sub­se­quent quar­ters. Most im­por­tantly, macroe­co­nomic sta­bil­ity has been re­stored. On the other hand, it is cer­tainly not per­form­ing to po­ten­tial—which some ar­gue is around 8-8.5%—as the govern­ment’s spin doc­tors are ar­gu­ing.

This po­ten­tial can be tapped only if the in­vest­ment lev­els, which have dropped to wor­ri­some lows, re­cover. But this is eas­ier said than done. The le­gacy of bad debts or what Arvind Subra­ma­nian, chief eco­nomic ad­viser, de­scribes as the twin bal­ance sheet prob­lem (be­cause it af­fects the books of both com­pa­nies and the banks who ex­tended the loans) is not some­thing that can be re­solved overnight.

Along­side the dis­rup­tions caused by struc­tural pol­icy re­sponses like GST are caus­ing con­sid­er­able pain. As the old busi­ness struc­tures built over seven decades are re­placed, rather abruptly in some cases, the new sys­tems are not up and ready to take over—in­deed, ex­e­cu­tion of ideas is where this govern­ment has erred. It is the fall­out of this tran­si­tion, which is lend­ing hope to crit­ics and a cause for worry to the govern­ment.

In a col­umn pub­lished in Mint (bit.ly/2y248gh), Indira Ra­jara­man, al­luded to this phe­nom­e­non very suc­cinctly. Ac­cord­ing to her, GST has com­pletely re­cast the ex­ist­ing riskshar­ing mech­a­nism, deal­ing a death blow to re­tail trade vol­umes. The so­lu­tion, Ra­jara­man ar­gued, is not to back­track on GST (as some po­lit­i­cal par­ties are sug­gest­ing), but in­stead to fix the ano­maly through tweaks (one of which was ac­cepted by the GST Coun­cil on 6 Oc­to­ber by putting in place quar­terly fil­ing of re­turns, in­stead of ev­ery month).

Sim­i­larly, the govern­ment’s an­ticor­rup­tion ini­tia­tives are forc­ing a tran­si­tion to a more trans­par­ent trans­ac­tions frame­work—ex­actly why real es­tate, which thrived on un­ac­counted cash, is in such dol­drums. Here too, the al­ter­na­tive frame­work has been slow to evolve and the govern­ment and other in­sti­tu­tions like the Re­serve Bank of In­dia (RBI) are guilty of not push­ing hard on walk­ing the coun­try through the re­quired be­havioural change.

The Econ­o­mist In­tel­li­gence Unit in a note is­sued last week said as much. “The de­cel­er­a­tion in bank credit growth to in­dus­try is partly at­trib­ut­able to the RBI’S ini­tia­tives and the Bharatiya Janata Party’s ef­forts to re­duce cor­rup­tion at higher lev­els of busi­ness and govern­ment. How­ever, the dif­fi­cult busi­ness en­vi­ron­ment and slow-mov­ing ju­di­cial sys­tem will make the tran­si­tion to a more mar­ket-driven fi­nan­cial sys­tem ex­tremely dif­fi­cult,” and then added, “We be­lieve that a re­vival in pri­vate in­vest­ment de­pends on the govern­ment in­ject­ing ad­di­tional cap­i­tal to banks’ bal­ance sheets, but also on com­pa­nies read­just­ing their busi­ness mod­els to the new fi­nan­cial sys­tem.”

In the fi­nal anal­y­sis, it can safely be said that the at­ten­tion to the econ­omy is wel­come; but re­duc­ing it to a po­lit­i­cal blame game is not. And look­ing at a new and rapidly trans­form­ing In­dia through a con­ven­tional lens is a bad idea.

The Union govern­ment, which has vis­i­bly be­gun its count­down to the 2019 gen­eral elec­tion as well as elec­tions to key state as­sem­blies like Gu­jarat, may be tempted to hit the panic but­ton. Even though po­lit­i­cally ex­pe­di­ent, it would be very my­opic in terms of the long-term health of the In­dian econ­omy.

Anil Pad­man­ab­han is ex­ec­u­tive edi­tor of Mint and writes ev­ery week on the in­ter­sec­tion of pol­i­tics and eco­nomics. His Twit­ter han­dle is @cap­i­tal­cal­cu­lus.

Re­spond to this col­umn at anil.p@livemint.com.

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