Challenging Year Ahead for Indian Economy
McKinsey Global Research predicted in July 2019 that the future belongs to Asia. India and China would lead the growth, it said, going by the value chain measured in terms of the ratio of gross exports to gross output at 8.5%, together with emerging Asia’s soaring consumption and its integration into global flows of trade, capital, talent, and innovation. 
 
Come December 2019, India’s disappointing growth and China’s disappointing external trade, following the US hegemony in international trade, would appear to water down the dream run predictions. Several rising corporates in India are mired in frauds, poor governance, and unethical approaches. Education and health have become matters of concern with inadequate access and high costs. Banks have hit headlines with scams and balance sheet blunders. I wish I would start on a more hopeful note. 
 
Basing their conclusions on NSSO Employment Surveys for 2004-05 and 2011-12 and the periodic labour force survey for 2017-18, a research study by Mehrotra and Parida on Employment (New Indian Express, 6 November 2019) reveals that employment has fallen by 9 million in six years.  The agricultural sector leads the data on the decline in jobs by 27milllion and the manufacturing sector by 4 million. While the former could be attributed to structural change, it is the decline in manufacturing that is worrisome. The services sector showed an uptick to creating 17 million jobs, although their sustainability is uncertain.
 
Growth in the agriculture sector has seen ups and downs and is currently running at just around 2 percent. Farmer suicides have been witnessed in some of the key producing states. Despite the launch of schemes such as the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY), the national agricultural insurance, and the Pradhan Mantry Fasal Bima Yojana (PMBY), along with the national agricultural market (e-NAM) and digital initiatives, reforms in agriculture marketing remained nascent. Markets that were to reach the doorsteps of the farmers, with assured pricing of their produce, also remained elusive.   
 
Though consumption-led growth strategy based on market competitiveness replaced austerity-led growth strategy since the embrace of liberalisation, privatisation and globalisation, it is only the automobile and pharmaceuticals sector that transited to becoming globally competitive. 
 
The textile sector, particularly low value but with a high export capability, indicated that countries like Vietnam, Bangladesh and Thailand took the space vacated by China while we could not take advantage of it due to our unwelcome tariffs and duties. We have not been able to put in place an eco-friendly policy framework for making the sector export competitive. 
 
Segments such as machinery and equipment, non-metallic minerals, IT hardware requiring more innovation and incubation, continued to lag despite the Make in India, Stand up India, and Start up India initiatives. The effect is that we moved to negative growth in manufacturing after facing temporary booms and busts. 
 
Gaps between promise and performance have only been widening in both the agriculture and manufacturing sectors. Reforms in foreign direct investment (FDI), corporate tax concessions, the insolvency and bankruptcy code (IBC code), the real estate regulatory authority (RERA), the goods and services tax (GST) have all been tossing up and down to deliver. 
 
While we have comfortable inflows in FDI with an attractive 2% current account deficit and a forex balance of $429 billion as at the end of November 2019, investment in core sectors did not happen. The slowdown in growth that we have been witnessing during the last few quarters as a continuum can be reversed.
 
The economy needs a boost in public investments and private investments. Governments should spend more in the case of the former by identifying all the projects that are quick yielding. 
 
Private investments should come in with the benefit that the corporate tax concessions already conceded and the triggers of the market mechanisms through the stock exchanges. Private investors, keeping an eye on global impacts, particularly, on the volatile commodity markets, should move in tandem with public investments and focus on deliverables to improve their sagging credibility.
 
Growth impulses should be generated unabated to reach the targeted Rs5 trillion economy by 2022 and this would become possible only when we cross the 8% annual growth rate.
 
Removing all forms of subsidies to the political constituency – legislators and parliamentarians, tweaking the farm subsidies to directly reach the cultivators and not just farmers; making lease markets more attractive for the micro, small and medium enterprises (MSMEs) to set up new units and ensuring that no viable manufacturing unit downs its shutters by suitably mandating the banks and establishing industrial health clinics in States that have a preponderance of sickness along the lines of the proven model of the Telangana Industrial Health Clinic; ensuring that banks and NBFCs enhance their risk appetite not through targets but through sensitising them to the economy’s imperatives. 
 
These are the measures that need the finance minister’s attention. While the mergers of the public sector banks (PSBs) may leave fewer banks for the government to deal with, their thorough clean up and improving governance does not brook delay. But all these pose a real challenge in turning promise into performance quarter after quarter for the whole year. 
 
There is leg room left in the tax-GDP ratio that the finance minister can take advantage of. GST has scope to increase in price-elastic products provided that the promise given to manufacturers on GST is greased through timely release of input tax credit. FM’s direction of the budget would decide her option. 
 
In any case, cooperative federalism lies in taking the States on the same page as the Union government. In the current political controversies surrounding the National Population Register- National Register of Citizens (NPR-NRC) and the Citizenship Amendment Act (CAA) followed by the BJP losing the mandate of the people in the recent elections in Jharkhand, and with the State of Delhi going in for elections shortly, this Budget proves a big challenge both economically and politically.  
 
If it is an austerity-led growth, the government should incentivise savings. Such savings get into the pool of investments when investments become more attractive than financial savings. If, on the other hand, the model is of consumption-led growth, the government should keep more money in the hands of the people. As of now financial savings are fast losing their lustre with falling deposit rates. 
 
(Dr B Yerran Raju is author of the ‘Story of Indian MSMEs: Despair to Dawn of Hope’’ and an economist. The views are personal.)
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    COMMENTS

    Ramesh Poapt

    4 weeks ago

    catch 22 for govt!

    Fitch lowers India's economic growth to 4.6% in FY20
    Global ratings agency Fitch Ratings on Friday lowered India's economic growth forecast to 4.6 per cent in 2019-20 due to domestic factors, in particular a squeeze in credit availability from non-banking financial companies (NBFCs), and deterioration in business and consumer confidence.
     
    According to Fitch, growth is expected to be around 4.6 per cent this fiscal against an earlier estimate of over 5 per cent.
     
    "Our outlook on India's GDP growth is still solid against that of our peers, even though growth has decelerated significantly over the past few quarters, mainly due to domestic factors, in particular a squeeze in credit availability from NBFCs and deterioration in business and consumer confidence," the Fitch report said.
     
    "Fitch expects growth to slow to 4.6 per cent in the financial year ending March 2020 (FY20), from 6.8 per cent in FY19, which is still higher than the 'BBB' median of 2.8 per cent. We expect growth to gradually recover to 5.6 per cent in FY21 and 6.5 per cent in FY22 with support from easing monetary and fiscal policy and structural measures that may also support growth over the medium term," it added.
     
    Further, Fitch Ratings kept India's credit worthiness indicated by its Long-Term Foreign-Currency Issuer Default Rating (IDR) unchanged at 'BBB-', stating that India's growth outlook was stable.
     
    The agency said that India's rating balances on a still strong medium-term growth outlook, compared to 'BBB' category of peers, and relative external resilience stemming from solid foreign-reserve buffers against high public debt, a weak financial sector and some lagging structural factors, including governance indicators and GDP per capita.
     
    "The affirmation of the ratings incorporates our expectation of moderate fiscal slippage relative to the Central government's fiscal deficit target of 3.3 per cent of GDP in FY20," the report said. 
     
    "The government is again facing a trade-off between stimulating the economy and reducing the deficit in the medium term. Some fiscal slippage has occurred in recent years against government targets, even during periods of sustained stronger growth," it added.
     
    The FY20 deficit target has already been exceeded by end-October due to weak revenue intake, and a deceleration of nominal quarterly growth suggests further revenue pressure for the rest of the financial year. 
     
    "The government has indicated that its corporate tax rate cut could lower revenue by 0.7 per cent of GDP in FY20 and hopes to finance spending by more aggressive asset divestments, including Air India and Bharat Petroleum Corporation Limited," the ratings agency said. 
     
    "We believe there is a risk of more significant fiscal loosening in the event of continued weak GDP growth, for example, in the context of lingering problems in the NBFC sector," it said.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Economy trapped in Four Balance Sheet problem: Ex-CEA
    Citing reasons for the "severe illness in the economy", former Chief Economic Advisor Arvind Subramanian has pointed out that India is now facing a "Four Balance Sheet" challenge -- comprising banks, infrastructure, plus NBFCs and real estate companies -- and is trapped in an adverse interest growth dynamic.
     
    In a Harvard University Working Paper 'India's Great Slowdown: What Happened? What's the Way Out?' the authors Subramanian and Josh Felman have said that India is facing an adverse interest growth dynamic, in which risk aversion is leading to high interest rates, depressing growth, and generating more risk aversion.
     
    On the FBS (Four Balance Sheet) challenge, the paper said that examining the pattern of growth in the 2010s, standard explanations cannot account for the long slowdown, followed by a sharp collapse.
     
    "Our explanation stresses both structural and cyclical factors, with finance as the distinctive, common element," it said.
     
    The first wave -- the Twin Balance Sheet crisis, encompassing banks and infrastructure companies -- arrived when the infrastructure projects started during India's investment boom of the mid-2000s began to go sour.
     
    The paper said that the NBFC-led credit boom financed unsustainable real estate inventory accumulation, inflating a bubble that finally burst in 2019. "Consequently, consumption too has now sputtered, causing growth to collapse. As a result, India is now facing a Four Balance Sheet challenge - the original two sectors, plus NBFCs and real estate companies," it said.
     
    On the remedies, Subramanian and Felman have said that the standard remedies are unavailable: monetary policy is stymied by a broken transmission mechanism; large fiscal stimulus will only push up already-high interest rates, worsening the growth dynamic.
     
    "The traditional structural reform agenda - land and labour market measures - are important for the medium run but will not address the current problems. Addressing the Four Balance Sheet problem decisively will be critical to durably reviving growth," the authors said.
     
    Raising agricultural productivity is also high priority. And even before that a Data Big Bang is needed to restore trust and enable better policy design, they added.
     
    Subramanian and Felman have proposed several strategies to halt the current vicious economic spiral, the most critical one being to address the Four Balance Sheet challenge - the stress in banks and NBFCs on the financial side, and infrastructure companies and real estate on the corporate side.
     
    "Policies need to act on the 5 Rs: Conducting a new Asset Quality Review to cover banks and NBFCs (Recognition), making changes to the IBC to ensure that participants actually have incentives to solve the problem (Resolution), create two executive-led public sector asset restructuring companies ("bad banks"), one each for the real estate and power sectors (Resolution), strengthening oversight, especially of NBFCs (Regulation), Linking recapitalisation to resolution (Recapitalization), shrinking public sector banking (Reform)," they added.
     
    Flagging the danger of these policies being politically difficult, the authors have said that there is, of course, a reason why these policies have not been implemented before.
     
    "They are politically difficult, and other easier alternatives have seemed more attractive. But the government currently has a tremendous amount of political capital."
     
    The paper also stresses that these since no other policies have succeeded, this will be a laborious task.
     
    "And by now all the alternatives have been tried, and found wanting. So, finally, after a long and difficult decade, the government has both the opportunity and the clear need to resolve the Four Balance Sheet (FBS) problem. But we must be clear. Realism demands a recognition that resolving the FBS problem, as well as the difficulties in agriculture, will inevitably take time. A slow-bleed over many years led to the current predicament. The way out will also be laborious."
     
    The authors have warned against entrenched capitalism. "India's weak state capacity and the entrenched stigmatized capitalism has stymied private initiative and honest public officials for a very long time. There are no quick solutions. A corollary is that sustained effort will be needed. Complacency remains an abiding danger," Subramanian and Felman said.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Aditya G

    1 month ago

    Ex-post analysis after holding a position CEA in the Govt of India is reductive. Hindsight is 20/20 and has no value. What did he do while holding the position of CEA? It is the job of CEA to see these issues are resolved or at least considered and bring forth to the Finance Ministry. I guess bureaucracy has it's way of screwing up the information flow.

    K C Gangadhar

    1 month ago

    This may look all fine in the exalted isolation of Harvard. But today's tamasha at the GST meeting of State Finance Ministers giving little room for the FM to tackle the difficult position and demanding the shortfall compensation without delay reeks of political opportunism. I find no easy solution than to relax the Fiscal deficit targets and give a decisive push to the numerous infrastructure projects languishing with a hope that it will kick start the economy.

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