How Can The Government Revive The Economy ?

The economic growth has recently slowed down and the government is concerned about it. There are mixed reactions till now. The stock and the bond markets do not appear to be enthused with the signals from the government. In my view, the markets are looking for more confidence in the economic growth. That is missing as of now. 

As also pointed out by various commentators, the current slowdown is on account of a slowing demand in private investment, private consumption, and net exports. The government has announced steps like bank recapitalisation and sops for the automobile sector. But these will not create fresh consumption or investment demand. Exports are even more difficult to accelerate in view of a global slowdown, currency devaluation by competitors, and our inability to attract large scale manufacturing from out of China.

The government needs to move beyond token measures and take bold and specific steps to boost demand. I would suggest the following measures :

1) Learn from our own past experience. In the years 1998-2003, the Vajpayee government had launched a massive public expenditure programme through the building of highways. It had also convinced the investors of its serious intent on privatisation of public sector enterprises. We have an opportunity to repeat the same with several sectors. Airports is one good area.

2) Learn from international example. Several past administrations of the U.S.A. have successfully pump primed the economy out of slowdown. Reagan and Bush Sr administrations were the last ones to do so with a sense of balance. It is important to be focussed on growth, but not over do the same. The subsequent U.S. administrations have overdone the same, leading to the 2008 crisis and the subsequent inability to sustain real growth.

3) Be clear about the trade-offs on the path to high growth and take conscious risks. Today, the government is being pulled in all directions by voices from multiple sectors. One key trade-off is that of the growth versus fiscal deficit. There are arguments on both sides. But the government must decide on its path, be open about it, and follow it. My preference would be to loosen the fiscal bag for two years along with strong productivity linked measures. The modern monetary theorists (MMT) would not mind this approach, though many others would not like this. But, what is the alternative? Ideally, the focus should have been to boost productivity only. But in order to boost confidence of the consumers and investors, the government will have to lead from the front in spending, albeit in a transparent and equitable manner. 

4) Focus on rural income and small and medium enterprises (SMEs). It is well known that the real income of the farmers has stagnated over the last five years. This is an opportunity to expand rural spending in various ways. The marginal propensity to consume is the highest with the rural poor. Expand the social schemes like PM-KISAN and MNREGA. The SMEs are suffering on both ends, i.e., lower demand from large corporates, as well as higher cost of working capital. They need life support as of now. This needs to be designed and delivered soon. 

5) Be judicious on the tax policy. The rich people need far more pampering than the poor to part with their savings. The former ask for tax cuts because they otherwise do not find adequate opportunity to earn a decent post-tax return. So, focus on improving the ease of doing business rather than cutting direct tax rates. The current bureaucratic environment in taxation, permissions, compliances, etc asks for huge courage and stamina to run an efficient business, especially for small units.

6) Be clear on the balance between rewards to labour and capital. It is a zero sum game. At any given level of production, the gain for one is a loss for the other. Currently, the government actions are predominantly in favour of capital providers. As a result, the wages and the number of jobs are suffering. The government should carefully evaluate if this approach is helping in its desired objective of higher economic growth. 

7) Respond smartly to the global developments. The global scenario has been deteriorating in many ways. The E.U., Japan, and China are already in either a recession or a slowdown. The U.S. has borrowed some growth against reduced taxes, but that may end soon. The record debt levels of the U.S. as well as of the world and the adverse geo-political tensions are not comforting factors either. These are no more cyclical factors. So, it is unlikely that our exports would pick up anytime soon. In this backdrop, the Indian government must fortify its domestic led growth in case of any severe global shocks in the next 12 months. 

The monetary measures are not covered here but are expected to be accomodative to aid growth, as already mentioned by the Reserve Bank of India. Monetary measures, on their own, would not help revive growth. A borrower will borrow and invest only if she is confident of enough demand. Hence, monetary policies need to be supportive but are not the primary driver of growth today. 

The afore-mentioned points require the policy makers to make some difficult choices and then execute them with all sincerity. Vacillation does not help. Dialogue with stakeholders, commitment to the objectives, and getting on with the action is required at the earliest.