Modi 2.0 has an uphill task of fixing the economy
The people of India have given a massive mandate to the NDA to rule the country for another five-year term. It is time to leave political acrimony behind and focus on governance. The foremost task of the government should be to address the daunting economic challenges facing the nation.
Managing the macro headwinds
During the last five years India has been in a macro sweet spot. The favourable global environment, soft commodity prices, fiscal consolidation and declining inflation strengthened India’s macros. Sustained FPI flows helped finance the CAD. This benign environment is unlikely to continue and there are signs of trouble looming on the horizon. The shortfall in tax collections in FY2019 means that the fisc is more expansionary than what the budget figures suggest. The NBFC crisis and the liquidity squeeze in the economy have severely impacted some segments like autos. This has started affecting economic growth.
Addressing the growth slowdown
The biggest challenge facing the government is the growth slowdown. We might clock a GDP growth rate of around 7 percent in FY 2019-20. This might be one of the best among the large economies in the world, perhaps the best, but would be well below our potential and woefully inadequate to realize our goals. The global economic environment is not favourable with global growth slowing down to 3.3 per cent in 2019 from 3.6 per cent in 2018 (IMF projections).
When there is a growth slowdown, the standard response is to stimulate growth: through monetary stimulus by the central bank and fiscal stimulus by the government. But monetary stimulus (the RBI reduced rates twice so far in 2019) is not producing the desired effects since monetary transmission is constrained by the liquidity squeeze in the economy. On the fiscal front, high fiscal deficit leaves little elbowroom for the government to provide the stimulus. This calls for structural reforms like land and labour market reforms even while addressing the liquidity squeeze and fiscal concerns.
The slowdown is sharp in segments like autos. But this is cyclical rather than structural and therefore can be managed by addressing the main cause of the problem. A major cause of the slowdown is the NBFC crisis.
The NBFC crisis
During the last several years, the NBFCs have been playing an important role by providing credit to retail and SMEs apart from their traditional strength in the hire purchase market. During the last few years, NBFCs accounted for almost 70 per cent of the borrowings in the corporate bond market.
The surge in credit growth by NBFCs was helped by the capital constraints experienced by the PSU banks. The NBFCs, in turn, were mainly funded by the mutual funds, which benefited from huge inflows following the financialization of savings triggered by demonetisation. The IL&FS crisis and crisis triggered by defaults by some corporate groups have snowballed into a major liquidity squeeze impacting lending in sectors like autos. The RBI has to initiate measures to address the NBFC crisis and ease liquidity. This is absolutely necessary for revival of demand in crucial segments like autos.
Reforms in land and labour markets
As mentioned earlier, it is time the government focused on some important structural issues. Some major constraints in accelerating India’s growth rate relate to the land and labour markets. Infrastructure development needs large tracts of land. Fast acquisition of land helped China develop world-class infrastructure in a short period of time. We cannot be like China since Indian laws relating to land and property are different from China’s. But the process needs to be speeded up. The prohibitive cost of land also is a constraint.
Similarly labour market needs urgent reforms. With the right kind of labour market reforms India can create large number of jobs in manufacturing. China is now a middle-income country with a per capita income of more than $9000. With rising wages, China will be forced to move away from many labour-intensive segments. Vietnam and Bangladesh are exploiting the opportunity created by the exit of China by setting up huge manufacturing capacity. India stands the risk of missing the bus because of her restrictive labour laws. Therefore, reform of the land and labour markets has to be a top priority of the government.
The data transparency challenge
Compilation of data, like the GDP estimates, in a huge and complex developing country like India has always been a challenge. Even though there were academic debates relating to methodology etc. in the past, never before has the authenticity of the data been questioned, like at present.
Policy decision-making requires authentic data and therefore it is important that the integrity of our statistical institutions is established beyond doubt and crucial economic data becomes transparent and of high quality. An independent statistical body comprising highly respected professionals should be entrusted with this task and this should be a top priority for the new government.
Addressing the rural distress
Around 50 per cent of India’s workforce is employed in the agriculture sector; but produce only 16 per cent of our GDP. This is the root cause of the rural distress. Farm incomes have to be raised and this is possible only through government intervention. But interventions have to be of the right kind. DBTs like PM Kisan are the right steps. Loan waivers are the worst form of competitive populism cutting at the root of healthy credit culture. Along with short-term measures to address the rural distress we have to initiate long-term measures for shifting the surplus labour in agriculture to non-agricultural activities.
Banking sector reforms
There are other areas that call for reforms, like the banking sector reforms. No country in the world, except China, has 70 per cent of banking under government ownership. PSU banks (Rs. 82,000 crore losses in FY2018) with their huge NPAs have imposed a great burden on the economy and become a major strain on government’s resources. The huge resources spent on recapitalization of PSU banks could have been spent much better and more productively on infrastructure, education and health. Even though the political acceptability of banking sector reforms is doubtful a strong government with political will can pull off a major brave structural reform in this area.
Mistakes are part of life. The new government has to learn from the mistakes of the past and move forward. Governing a huge and complex country like India with its incredible diversity and plurality requires tolerance, vision, wisdom and a high level of political sagacity and managerial competence. Let us hope the new government will rise to the occasion and wish the new PM and his team all the very best.
The huge mandate to BJP is an endorsement of its pro-development agenda. Initiatives introduced in different sectors have surely struck the right chord with Indians. As an NRI based in the Gulf, last five years have been the best period in the history of Indo-Islamic nations relationship. All the leaders of various Arab countries have immense respect for Narendra Modi and this will get further strengthened in the coming years. The image of India has been greatly elevated in the last five years and I am sure that the new generation will have much to cherish in coming years.
– Yusuffali M A, Chairman & MD , LuLu Group International
The decisive election results will propel India's growth to the next orbit and transform the country. The stellar and decisive leadership of Prime Minister has led to this magnificent mandate for development. The industry is tremendously excited about Modi 2.0. In the last five years, PM Modi has brought in innovative mega missions that have changed the lives of hundreds of millions of citizens.
– Vikram Kirloskar, President, CII
There is an urgent need to bring investments on track and boost consumption to better GDP growth from the current around 7 per cent level, which will help in generating more jobs. The next government will have to quickly plan for a robust reform agenda that would not only enhance consumer spending but will also create conditions for higher private sector investments and exports.
– Sandip Somany, President, FICCI