Recipe For Re­cov­ery

Auto in­dus­try claims not en­tirely cred­i­ble, here’s what must be done for econ­omy

The Times of India (New Delhi edition) - - An Ecstasy Of Ideas - Arvind Pana­gariya

Every cri­sis is an op­por­tu­nity, so goes the say­ing. For In­dian in­dus­try, it is an op­por­tu­nity to lobby for a hand­out from the govern­ment at tax­payer’s ex­pense. The auto in­dus­try’s case shows how far our in­dus­try lead­ers can cash in on this op­por­tu­nity. Mul­ti­ple rep­re­sen­ta­tives of auto in­dus­try have pleaded for help on the ground that this sec­tor ac­counts for 50% of all man­u­fac­tur­ing and has de­clined by 30%. Now, the lat­est press note on GDP by MOSPI re­ports that man­u­fac­tur­ing as a whole grew 0.6% in the first quar­ter of 2019-20. Sim­ple arith­metic show that this means that man­u­fac­tur­ing other than auto grew a fan­tas­tic 31.2% dur­ing the quar­ter. Wow!

But let us give the auto in­dus­try some rope and ac­cept that it is only hu­man to ex­ag­ger­ate to at­tract at­ten­tion in the midst of a cri­sis. As­sume that the share of au­tos in man­u­fac­tur­ing is not 50% but 30%, and that its sales fell not by 30% but 20%. Even then it fol­lows that man­u­fac­tur­ing other than auto grew a hand­some 9.4% dur­ing the first quar­ter of 2019-20. Does any­one be­lieve that?

A Reuters re­port also says that ac­cord­ing to a senior in­dus­try source au­tomak­ers, parts man­u­fac­tur­ers and deal­ers have laid off 3,50,000 work­ers since April 2019. The same re­port also says, “Reuters was able to iden­tify at least five com­pa­nies that have re­cently cut or plan to cut hun­dreds of jobs, mainly from their tem­po­rary labour force.”

One would think that in a sec­tor like auto in which em­ploy­ment is con­cen­trated in large com­pa­nies, it would be easy to pin­point a large proportion of lay­offs. There­fore, the fact that Reuters could only iden­tify five com­pa­nies with ac­tual cuts or plans to cut hun­dreds, not thou­sands, of jobs and those too mainly from the tem­po­rary labour force, makes one won­der how the “senior in­dus­try source” ar­rived at the 3,50,000 fig­ure. Could it be that ac­tual lay­offs are closer to a few thou­sand and not in hun­dreds of thou­sands?

The up­shot is that the auto in­dus­try is sim­ply not cred­i­ble in its en­treaties. It is build­ing its case for relief on what ap­pear to be con­cocted num­bers. A cri­sis ought to be an op­por­tu­nity for setting one’s house in or­der and restor­ing com­pet­i­tive­ness. What the in­dus­try needs to do is seek relief from reg­u­la­tory bar­ri­ers that give un­due power to bu­reau­crats, serve no pub­lic pur­pose and un­der­mine pro­duc­tiv­ity growth.

On its part, the govern­ment needs to view data pro­vided by in­dus­try scep­ti­cally and sub­ject them to care­ful scru­tiny. More im­por­tantly, it must im­prove its own data gath­er­ing ca­pac­ity and use ef­fec­tively data that it may have at its dis­posal. For ex­am­ple, for as­sess­ing the em­ploy­ment sit­u­a­tion, a good start­ing point would be the Pe­ri­odic Labour Force Sur­vey, which

When growth in nom­i­nal prof­its de­clines due to fall in in­fla­tion rate, even though growth in real prof­its may have been un­changed, it may dampen an­i­mal spirits

now pub­lishes de­tailed in­dus­try-wise quar­terly es­ti­mates for ur­ban In­dia.

Good eco­nomics says that if a slump is struc­tural, it re­quires restruc­tur­ing of the econ­omy. In such sit­u­a­tion, the govern­ment only adds to the pain by delaying restruc­tur­ing through its in­ter­ven­tion. If the slump is tem­po­rary, any coun­ter­cycli­cal ac­tion should be macro-eco­nomic in na­ture, not tar­geted to spe­cific sec­tors. A slump should also be a time to iden­tify and re­move reg­u­la­tory bar­ri­ers fac­ing af­fected sec­tors that serve no pub­lic pur­pose.

Mea­sures that the fi­nance min­is­ter has an­nounced in three suc­ces­sive pack­ages are mostly in line with these prin­ci­ples. To speed up restora­tion of growth, we also need RBI to con­tinue to let the ru­pee de­pre­ci­ate and cut its pol­icy in­ter­est rate by an­other half per cent. It’s also time for the govern­ment to let the in­ter­est rate on small sav­ings drop to aid trans­mis­sion of re­duc­tions in pol­icy in­ter­est rates to bor­row­ers. In­ter­ests of one spe­cific group can­not be al­lowed to compromise the re­cov­ery of the en­tire econ­omy.

Fi­nally, af­ter five years of ex­pe­ri­ence, the govern­ment must eval­u­ate whether its cho­sen in­fla­tion tar­get needs to be re­vised upward. The cur­rent in­fla­tion tar­get is 4% with 2% de­vi­a­tion on ei­ther side of it. But go­ing by RBI ac­tions dur­ing the last few years, it is dif­fi­cult to avoid spec­u­la­tion that it has in­ter­preted the tar­get as 4% or less. For the last two years, in­fla­tion rate has been con­sis­tently be­low 4% with the av­er­age in 2018-19 be­ing just 3.4%.

Un­like a ma­ture de­vel­oped econ­omy, a rapidly grow­ing developing econ­omy un­der­goes rapid and con­stant restruc­tur­ing. Changes in rel­a­tive prices of dif­fer­ent ac­tiv­i­ties pro­vide crit­i­cal sig­nals for this restruc­tur­ing. But given down­ward rigid­ity in prices, low in­fla­tion lim­its the space for rel­a­tive prices to move. This calls for mod­er­ate in­fla­tion at rates such as 5-6%. Higher in­fla­tion than cur­rently is also jus­ti­fied by the pos­si­bil­ity of money il­lu­sion on the part of en­trepreneur­s. The lat­ter ob­serve prof­its in nom­i­nal terms. As a re­sult, when growth in nom­i­nal prof­its de­clines due to fall in in­fla­tion rate, even though growth in real prof­its may have been un­changed, it may dampen an­i­mal spirits. This is the only way to un­der­stand wide­spread com­plaints of weak cor­po­rate prof­its when they have held up be­tween 11 and 12% of GDP in re­cent years.

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