Getting India’s growth story back on track
Signalling its intent to make amends for the relative neglect of agriculture, the very first cabinet meeting of the NDA government widened the scope of the PM Kisan Samman Yojana, a flagship scheme to transfer INR 6,000 to all the 145 million-odd farmers in the countryside. Among the various other important decisions taken later on, two cabinet committees were constituted to address investment and growth, employment and skill development
The re-elected Narendra Modi-led NDA government has hit the ground running, with ministries readying action plans for the next 100 days and vision statements. Getting the flagging growth story back on track no doubt is its top priority. With slower GDP growth of 6.8%, the country has lost the pole position of being the world’s fastest growing large economy in the world. The slowdown stems in large part from the festering agrarian crisis, dampened animal spirits of investors, reflected in sluggish investments, both foreign and domestic. Inadequate employment generation is the result.
Policy attention at the highest levels of government is doubtless necessary to reversing the deceleration in GDP growth that has set in since 2016-17. An honest appraisal of why this happened in its first five-year term is warranted as some of its decisions – like the withdrawal of 86% of currency in November 2016, for instance reflected a “colossal muddle, having blundered in the control of a delicate machine”, the working of which it did not understand, to paraphrase the great economist John Maynard Keynes. There is limited space for such costly disruptions in the lives of a billion people.
Signalling its intent to make amends for the relative neglect of agriculture, the very first cabinet meeting of the NDA government widened the scope of the PM Kisan Samman Yojana, a flagship scheme to transfer INR 6,000 to all the 145 millionodd farmers in the countryside. Among the various other important decisions taken later on, two cabinet committees were constituted to address investment and growth, employment and skill development. This indeed augurs well for reviving investor sentiment and tackling the high and rising rates of joblessness in the economy.
Quasi-universal income support to farmers is welcome, considering the spread, depth and intensity of the crisis in agriculture, which accounts for one out of two working Indians. Although such distress did not impact the sweeping electoral mandate for the Modi government – which secured a higher vote share even in rural areas, including those that are drought-hit – the fact that this measure was one of its first decisions indicates the importance it attaches to farmer welfare. The NDA ambitiously promised in its first five-year term to doubling farmer incomes by 2020. This has so far proved elusive.
Farmer incomes have been depressed, if not stagnant, over the last five years. There is also likelihood of further declines in the future, thanks to climate change or global warming. While income support makes a difference, the need is also for market reforms to make farming more viable; adoption of technology to make crops heat resistant; a comprehensive crop insurance scheme; more outlays for irrigation that can make agriculture less rainfall-dependent. The monsoon has now set in after a week’s delay. Any deficit in the sowing months of June-July will affect output and farm incomes.
The share of agriculture has shrunk to 14% in the nation’s GDP but its fortunes are crucial to boosting overall growth. The link is from the demand side that impacts consumption, a crucial engine of growth. Lower real incomes in the countryside have adversely affected sales of fast moving consumer goods like shampoo, toothpaste and biscuits. Offtake of cars, two-wheelers and tractors has been sluggish in rural India. Reversing this decline in private consumption through unleashing productive forces in agriculture is therefore vital for the rapid expansion of the economy.
Equally crucial for growth is revival of the investment cycle as both foreign and domestic investors face serious difficulties in doing business on the ground. FDI equity inflows declined for the first time in six years in 2018-19. Inflows have declined sharply in drugs and pharmaceuticals by 74% over 2017-18 due to regulatory uncertainty. In telecom, they plunged by 57% on account of the stressed financial condition of major players. Fresh investments by domestic players have also ground to a halt. Kick-starting more investment demand is an over-riding priority.
However, the idea behind a cabinet committee on investments and growth is not new as the previous UPA regime during 2004-2009 constituted an Investment Commission led by a leading industrialist. The track record of this
Commission was mixed, thanks to different voices within the government. Even though the earliest formulation made no distinction between foreign and domestic investments, doubts were voiced on whether the Commission was intended to improve the overall investment climate for only MNCs. Or was it more broadly expected to boost domestic investments as well?
To be more effective, the NDA’s cabinet committee on investment and growth must make no distinction on whether investments are foreign or domestic in origin. After all, capital has no colour and an act of investment is the same, whether it comes from outside or inside. Inviting such investments also entail similar policies as investors essentially face the same problems on taxation, infrastructure and the environment in general. The rapid improvement in the country’s rankings on the Ease of Doing Business should make it easier for both foreign and domestic investors to trigger investment-led growth.
Low consumption and investment demand are responsible for the highest rate of unemployment at 6.1% in 2017-18. The NDA government was initially upset over this number and even suppressed the official report of the National Sample Survey Organisation as it was only a draft. Instead of shooting the messenger when the news is bad, the task before the cabinet committee of employment and skills is to first of all restore the credibility of the nation’s statistical system so that its surveys can truly capture the real position of job creation.
The NDA regime came to power in its first term by promising development and jobs for the youth. This remains unaddressed and should be seriously taken up in its second term. This objective can be realised through deep-going reform of India’s globally outdated labour legislation to enable greater flexibility in hiring while providing a social safety net to workers. Strengthening - and continuing - the India growth story is vital for Modi 2.0 to succeed in its second term which it got with a huge mandate.