The nation’s focus on the Lok Sabha elections has diverted our attention from the serious economic challenges that will face the next government.
The latest Monthly Economic Report (MER) issued by the Ministry of Finance indicates that “India’s economy appears to have slowed down”. Among the main causes for this slow down, the MER lists “declining growth of private consumption, tepid increase in fixed investment, and muted exports”. This is what a slowdown looks like.
Numerous other indicators tell a scary story of their own. Unemployment is up, rural wages are down, savings are declining, and financial sector problems persist (with new challenges emerging in the NBFC sector).
Despite a weaker rupee, trade imbalances are worsening. A huge shortfall in government revenues will increase the actual fiscal deficit and constrain fiscal measures to boost the economy. And, here’s the really scary part: The Indian economy may be growing at a lower rate than indicated by official GDP data.
All this has happened in an inhospitable environment for India’s public institutions, including those that are critical for maintaining the health of the Indian economy. From the Reserve Bank to the Central Statistical Office (CSO) to the National Statistical Commission (NSC), institutional autonomy has been degraded.
How did we got here? After PM Modi took over, his government made critical errors of omission and commission. The government was aware of the emerging NPA crisis but apparently chose to believe that economic growth would resolve this issue. Unfortunately, banking sector crises usually do not resolve on their own. This hampered credit flow during the early Modi years.
The first two years also had deficit monsoons. These were also the years when government support prices saw only marginal increases and MGNREGA implementation was weak. It is not as if the government did not have fiscal space. It was blessed with a collapse in crude oil prices and raked in huge revenues by levying excise duties that kept fuel prices high for consumers. The government followed contractionary policies while rural demand was weakening.
In 2016, just as farmers were heaving a sigh of relief due to a normal monsoon, Modi announced Demonetisation.
This had a devastating long-term impact on the economy.
The current difficulties can in part be traced to that monumental, self-inflicted blow. A poorly designed, hastily launched, and poorly implemented GST was the last nail in the coffin. Shockingly, the government kept fiddling with economic data to somehow show that growth was high. Ongoing revisions of GDP data now show, incredibly, that the economy grew fastest in the year of demonetisation. No wonder then that India’s once highly respected statistical system faces international skepticism today.
Where do we go from here? Admittedly, there is much work to be done and in short order. The next government will have to first make sure that the institutional infrastructure for the Indian economy is credible and robust. To this end, the next government must bring forward a policy resolution that reaffirms India’s commitment to autonomy and professionalism in its economic and statistical institutions.
As we rebuild and strengthen our institutions, we must also focus on the drivers of growth in the short-term. There are severe problems in the rural economy and a debt overhang is impeding the agricultural sector.
The next government must address this through different instruments, including higher support prices and greater access to MGNREGA resources. A task force should be set up to develop a cash transfer program, such as NYAY, to boost consumer spending. Direct transfers can have multiplier effects that may boost unemployment in the short run.
In the financial sector, we may still not have a full picture of the NPA problems. To make things worse, it appears Mudra loan NPAs are spiking even as a scary situation is emerging in the NBFC sector.
The next government will have to take radical steps to help deal with a debt overhang that has ballooned during the term of the Modi government. This slow-motion crisis also has links to corporate balance sheets and the relatively limited private sector investment we have observed in the last few years.
The new government must focus on MSMEs. These businesses were badly hit by demonetisation and GST and have been facing a credit crunch. The Congress has put forward a transformative idea that would enable new MSMEs to operate without the burdens of the permission and inspection raj that hobble private enterprise in India. Another short-term measure is an incentive package for exporters, including MSMEs, that could help Indian exports get back on track.
We also need to urgently reform the GST. The immediate need is of a simple tax with one moderate rate while keeping essential goods out of the ambit of GST so that poor and low-income families are protected. GST should levy a different rate of duty for demerit goods and bring real estate, petroleum products, tobacco, and liquor within its ambit too. In addition, the compliance burden inherent in the current GST must be substantially reduced. This is where the new government must work closely with the states to ensure that GST ends up being truly reformative.
Employment is an overarching challenge. While the short-term measures described above are likely to boost employment, longer-term measures are needed for sustained growth in employment opportunities. We need structural changes, including a clearer line between public sector work and private enterprise, a sharper, outcome-oriented focus on public education and health, and modern frameworks for land and labour.
We also need to reassess the country’s consumption, savings and investment patterns to develop ideas for long-term sustainable and inclusive growth. Without human capital development and without rethinking India’s economic structure, India cannot achieve high middle-income status or meet the aspirations of its teeming youth.
We need a bridge to that true middle-income future. We need experienced leaders, expert professionals, strong institutions, and a vigilant citizenry to ensure that the bridge to the future is built. No more talk. Let’s get to work!
(Rajeev Gowda is Member of the Rajya Sabha )
(Salman Soz has worked with the World Bank and is Regional Coordinator of All India Professionals’ Congress)