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.)