Challenges for the New Government
THE STATE OF AGRICULTURE AND A SLOWLY SHRINKING BALANCE OF PAYMENTS MAY HINDER INDIA’S GROWTH STORY.
To call it the new government is perhaps too daring. Bharatiya Janata Party may well return in the coming general election. But its majority may be smaller – perhaps small enough to make it seek partners. If it loses and the Opposition forms the government, it is bound to be a coalition. This will be the biggest change after the election: The government will be less decisive, whatever its composition. In his Q&A session on New Year’s Day, the Prime Minister gave a long list of his government’s achievements. Others may not see all of them as achievements; in any case, there were many that were not significant. India, for instance, has over half a million villages; giving electricity to the last few thousand was a marginal feat. The list may give the impression that this government would leave India a perfect nation. That would be wrong. Despite a decade of high growth, the next government is going to face some urgent economic problems.
The first one is the state of agriculture. One does not have to look at figures; the farmers’ agitations that have erupted from time to time leave no doubt that they feel aggrieved. It is not clear what they are upset about. All the marches and demonstrations they had organised were spontaneous; there were no clear leaders, and no manifesto. One issue that has made headlines for years is agricultural debt. It is one issue on which every government has been ostensibly active. In the past 15 years, governments have forced banks to give loans to farmers regardless of debt worthiness. That is one – although not the main – reason for the dire state of the banks. Agricultural prices have not been rising as fast as expected. While the Congress governments pushed up minimum supply prices year after year, the BJP government has been less punctilious. But overall inflation has also come down; so it is not clear whether farmers have done worse in real terms. They had two terrible years of drought, but agricultural growth has been good in the past couple of years. So, farm income does not seem to be the problem.
There are two leading possibilities. One is that the billions of bank credit went to richer farmers who could mortgage assets and did not reach poor farmers who continued to borrow from moneylenders. The high-cost, high-risk loans have pushed small farmers and agricultural workers into dire straits. The other is that the government can no longer push up prices because an agricultural surplus has emerged. Too much rice is being produced; there is no shortage of wheat, and wheat farmers are doing too well if Punjab’s drug problem is any indication. The overall agricultural surplus requires a wholesale junking of traditional policies and preparation of agriculture should become internationally competitive.
The other major problem is going to be the balance of payments. It has been covered up by the enormous foreign exchange reserves. They have been sliding down, but too slowly to cause concern. However, exports of information technology are no longer growing, and the related migration of techies to the US has stopped. Trump is unpredictable, but he has already tightened up on visas for techies, and anything he does next will be worse. Although nonresident Indians are great supporters of Modi in general, their remittances to India are stagnating. They are not upbeat about India’s prospects, and their economic calculations override their political preferences.
On the domestic front, the two sectors that made India shine are education and health. Both have expanded considerably, and that is where they face problems. The output of schoolleavers and graduates has gone up enormously, but the quality of their education is poor, and they cannot get jobs. The output of fresh doctors too has gone up, but not enough, and the quality remains poor. And the pharmaceutical sector, which did extremely well for four decades on account of its low costs, has reached the end of the road. It can no longer copy American and European patented drugs as India was forced to tighten up its patent law.
All the bright spots have faded, and there is no sight of new ones. That does not mean there will be none. But someone will have to seek them out; someone will have to invest in them; someone will have to take the risky road. The road waits for daredevil riders.
The writer is a senior economist and was chief consultant in the finance ministry from 1991 to 1993