The Indian economy definitely seems to be in a ‘weak spot’ rather than a ‘soft spot’ despite being the fastest growing economy in the world. For the last three years it does appear that employment generation has lagged. GDP growth has been slowing down and industrial growth is stagnant, if not declining. Export growth has been unimpressive in the last three to four years.
The country has had good monsoons in general with shocks, at times, in specific areas or crops. The farm policies have not been able to handle either shortages or surpluses, with the latter meaning prices crashing below MSP. The government has had to resort to direct action to alleviate the condition of farmers through direct cash transfers and loan waivers. On the financial side, progress made on NPA resolution ran into a speed-breaker as the RBI circular relating IBC (Insolvency and Bankruptcy Code) was struck down by the Supreme Court. The important thing for the government is to recognise that problems exist in the economy. It would be interesting to see what view it would take now.
The 2014-19 policy framework was comprehensive and was implemented with clock-like precision. This included enhancing the ease of doing business environment and FDI, setting up eNAM, bringing in IBC, channelling funds to SMEs, financial inclusion through JAM, and emphasis on roads and railways.
However, the major success, which was also the clinching factor, was delivery of government services to the poor. The ‘micro’ implementation of macro polices was the single most distinguishing factor. The government made money work better by cutting out human intervention and enabling direct transfers to the poor. This came in terms of providing bank accounts, DBT, pensions, etc., and was supported by schemes on affordable housing and insurance.
It was hence possible for individuals to experience the benefits as they were tangible compared with macroeconomic numbers, which do not really strike a chord with people in rural areas.
What path then should the government preserve? The government in an open market economy plays two distinct roles. The first is through actual expenditure, either through the Budget or by way of activities undertaken by government bodies such as NHAI, ONGC and NTPC that raise money for investments through off-budgetary borrowings. The government cannot spend more than what is permitted within the constraints of the FRBM norms.
At present, the capital expenditure is in the range of Rs. 3-3.5-lakh crore, which includes defence that accounts for around a third of the total layout. Hence any expert view that the government spend more on infrastructure must be viewed with a pinch of salt as there are limits that will never be breached. Given that the Prime Minister was quite emphatic on the social thrust of the government, there will be no compromises on this front.
This leaves the government with policy. The two unresolved issues are land and labour reforms, which are contentious as job creation is a major problem and agriculture has become less attractive. Therefore, providing for lay-offs and land acquisition can be only gradual. The private sector should first look at the opportunities that can be leveraged, rather than lament the absence of these reforms.
One may recollect that FDI was a constant lament as long as the limits were lower. This government had reacted with alacrity and widened the frontiers. But when reality hit hard in the e-commerce space, the tone changed; there is little demand for being more open to FDI as the domestic industry gets affected.
Similarly, while the government can nudge lending to, say, SMEs, ultimately it will be commercial judgment that determines flow of credit. Also, just getting the RBI to lower repo rates will not make banks compromise standards nor make companies invest if there are less attractive opportunities. In short, while the government will clearly announce the thrust areas, the response has to come from the private sector. Taxes can be lowered, but India Inc. has to take the initiative to invest more.
Source: The Hindu Business Line, June 17, 2019