Recharging The Economy

Getting India’s GDP growth trajectory back to 8 per cent a year is critical for three reasons: Creating jobs, driving consumption and boosting investment. The Mid-Year Economic Analysis tabled in Parliament recently, however, makes for grim reading. GDP was predicted to grow at between 8.1-8.5 per cent in 2015-2016. That estimate has now been lowered to between 7-7.5 per cent.

Cutting through the data clutter, both global and domestic factors are at play. The slowdown in China and the European Union has led to a dip in exports for 12 straight months. Imports have fallen even more steeply, signalling a slowdown in domestic industrial production.

Economic management by the finance ministry has been lacklustre. The windfall gain of low crude oil prices has given India a cushion estimated at Rs 2.50 lakh crore. A third of that has been passed on to consumers as lower fuel prices. A portion has been appropriated by the government (through higher excise duties on fuel) to make up the likely shortfall in budgeted PSU disinvestment and tax receipts this fiscal. Only around Rs 75,000 crore has been used to boost government spending in infrastructure, especially highways and other civic projects.

Corporate investment remains subdued. Interest rates are still high and most companies’ balance sheets are stretched by domestic and foreign currency loans. The depreciation of the rupee against the US dollar has worsened the situation with several companies unable to fulfil their foreign debt obligations.

Lower oil prices should have enabled the finance ministry to meet the 2016-17 fiscal deficit target of 3.5 per cent of GDP. However, the Mid-year Economic Analysis is pessimistic on that as well, calling the target “challenging”.

Both the Reserve Bank of India (RBI) and the finance ministry have proved poor custodians of their respective domains. The RBI has reduced interest rates too little, too late. As a result, the balance between lowering inflation and boosting growth is skewed. Wholesale inflation has been negative for months, while retail (especially food) inflation is rising. Raghuram Rajan has thus managed to deliver not one but two undesirable outcomes: a deflationary economy and a low-growth economy.

The US Federal Reserve has done the exact opposite since the Lehman crisis in 2008. Faced with low growth, it slashed interest rates to 0-0.25 per cent (raised by 0.25 per cent recently) and pumped in billions of dollars to stimulate the economy. The results are apparent: the US economy is growing at a healthy clip of 2.1 per cent a year. Unemployment has fallen. Business confidence is up.

The second villain, metaphorically speaking, in straitjacketing the Indian economy is the finance ministry. While the RBI erred on interest rates and establishing more effective supervision of bad bank loans, the finance ministry has been an unimaginative steward of the economy. Its two budgets (July 2014 and February 2015) were desultory. Retrospective taxation — imposed thoughtlessly by then Finance Minister Pranab Mukherjee — should have been summarily removed in the July 2014 interim Budget but has been allowed to remain like a sword of Damocles over corporate heads.

Ask any foreign investor: the first complaint will be about the uncertainty caused by the government not removing retrospective taxation. It needed a committee headed by Justice A. P. Shah to squelch the harebrained move to impose Minimum Alternate Tax retrospectively on Foreign Institutional Investors. The imposition of various new cesses and cumbersome requirements in service tax regulations are contrary to the spirit of PM Modi’s attempt to improve the ease of doing business in India.

Significantly, financial inclusion through Jan Dhan Yojana, pension reforms, FDI liberalisation across sectors and the use of Aadhaar biometric cards to send subsidies directly to beneficiaries by cutting out middlemen have all emanated from the PMO. The finance ministry has used neither imagination nor wit in articulating a clearheaded and farsighted vision for the Indian economy. The stock market has given a clinical verdict on this performance: the Sensex and the Nifty are barely above the levels of May 2014, when the NDA government took office. Unless the finance ministry displays far better stewardship of the economy, the Lok Sabha election in 2019 will pose a bigger challenge to the BJP than it imagines.

So what should be done? Fortunately, India is in a sweet spot: demographics favour us. We have a young workforce. A startup ecosystem (the third-largest in the world after the US and Britain) is developing rapidly. An aspirational middle-class and rural-to-urban mobility could soon spur a consumption boom.

All these factors though have to be harnessed skilfully. The demographic dividend can easily turn into a demographic — and social — disaster if 10 million new jobs are not created every year. Without a sharp increase in corporate and public investment that remains a serious concern.

The Seventh Pay Commission and one rank, one pension (OROP) benefits will, however, boost consumption in 2016. If oil prices remain low through 2016 (as they are expected to), this will provide India the window of opportunity to slingshot the economy into a higher orbit of growth.

For this to happen, the February 2016 Budget must provide for more public spending, lower taxation and incentives to the corporate sector, including a clear roadmap for reducing corporate tax to the promised 25 per cent. Many of these reforms can be done (as with FDI liberalisation) by executive order outside Parliament.

There are no excuses any longer for letting the economy drift. Every global investor says India has the potential to grow at 9 per cent a year. A 7 per cent growth rate signals inept economic management. And it is not the Goods and Services Tax (GST) alone that can add 1.5-2 per cent to the GDP growth as many believe. It is investment, consumption and innovation that will do so.

For investors, red tape remains ubiquitous, the promised red carpet unfurled. Cut the former, lay out the latter and the pathway to 8-plus per cent GDP growth will rapidly emerge.

(This story was published in BW | Businessworld Issue Dated 11-01-2016)