Great expectations

The stock markets have been on a high, buoyed by information about lower Government borrowings, better bank credit growth, and improved third quarter earnings of some companies and higher direct tax collections. The media suddenly appears upbeat, and suggestions for the Budget are flooding the channels. Amidst this din, it appears important to take a reality check on the numbers as well as the expectations for 2018.

Forecasts of global growth by the World Bank and the IMF for 2018 appear to indicate that the coming year would be one of robust growth, perhaps the best since the global financial crisis. The World Bank indicates global GDP growth of over 3.1%, while IMF expectations are 3.7%. ADB expects growth among its member countries to exceed 6%. There are no indications of a slowdown in China. Pakistan and Bangladesh are doing reasonably well, with inflation under control and growth in the range of 5% to 6%.

There is good news from the USA as well. Retail sales were up 5.5% in November and December 2017, crossing $700 billion for the first time. Unemployment is low and the new tax laws are likely to yield an improvement in tax revenues, much to the annoyance of critics of the Trump administration.

Economic growth across the globe has already led to a hardening of commodity prices, with oil over $65 and other commodities including coal, copper and aluminum having gone up substantially in the last six months.

All this is not necessarily good news for India. Hardening commodity prices, especially oil, will result in higher foreign exchange outflows as well as higher retail prices for fuel and oil based products. In the absence of increases in exports, the trade deficit will increase. There is also likely to be inflationary pressures on the economy. There is no indication that manufacturing activity has picked up.

Investible funds are rolling over in the financial markets, and both private and public savings are seeking returns through what is essentially a mechanism of transfer of ownership from one hand to the other without necessarily creating any fresh goods or services. Reports are that over Rs 40 lakh crores has been the increase in asset valuations in the financial markets in 2017.  Savings are thus locked up in the markets, and unless these profits leak down into consumption, there is little likelihood that there will be a pressure on supply and thus an increase in production.

That leaves the burden of investment back on the shoulders of the Government, which can only do a few specific things like infrastructure and defence. All the other programmes, like low cost housing sanitation and smart cities, for example, depend heavily on the performance of the partner in the programme, whether private individuals or city governments.

Finally, the resources of the Government, at the Central as well as the state level, are severely strained. Revenue receipts are still low as a percentage of GDP compared with other developing countries, and revenue expenditure exceeds these receipts, forcing capital expenditure to be largely financed through borrowings.

Outside these numbers, there is distress in the rural economy, as returns from agriculture are inadequate to lift farmers out of poverty. There is also a pressure for jobs and employment, which the economy is not able to meet, with over 10 million job seekers entering the job market every year.

And, elections are due in 2019, which means that the central Government has to demonstrate that much has been achieved. While this appears to be an uphill task for the Finance Minister, yet several options are available to him.

First, even at 6.5% growth, India remains among the top performers in the world. There is no indication that this will go down — on the contrary, all expectations are this will improve. The FM is starting from this comfortable base. He has been following a policy of prudent fiscal consolidation ever since he took over in 2014, and the small slippages are likely to be more due to an overestimation of nominal GDP numbers, rather than any imprudent expenditure. This gives him room to take on the more difficult problems.

An important one will be agriculture and rural distress. In the long term, the era of the farmer making a living through cereal cultivation alone appears to be over, and all those that have diversified into other crops, like horticulture, fruits and organic farming, are benefitting from returns far higher than from rice and wheat alone. To introduce a new green revolution focusing on commercialising agriculture should be the goal, using all the technological resources of the agricultural departments, universities and the food processing commercial companies. This effort has been due for some time, and hopefully, there will be an announcement to revolutionise agriculture and agricultural incomes. This is important from the political point of view as well, given the unrest in the rural areas that has been witnessed in the last couple of years. Next is the problem of employment. The skill development initiatives have not succeeded, and the youth agitations are a clear indication of the frustration that is building up. An alternative that was considered was a guaranteed income scheme, while this may take care of poverty and want in the short run, it will not provide livelihoods and skills required in the economy.  At the core is the poor state of the education system that produces people unsuited for employment needs of the 21st century. Again, this is a problem that should have been tackled several Budgets earlier, but a start needs to be made.

There appear to be no easy solutions. Improvements in education, incentives for investment, revival of the construction sector, and providing room for consumption expenditure are all needed, in addition to Government investments in roads, ports, airports, metros and railways. The progress has been very slow. Government has also promised a number of projects overseas, in Sri Lanka, Myanmar, Bangladesh and in certain parts of Africa — the progress is slow, and the multiplier effects to Indian industry are yet to be realised. In short, no easy answers, but all options need to be tried.

It is important to look at private investment. A significant reduction in corporate as well as personal income tax rates, including the removal of all surcharges, will help boost investment as well as consumption, and this is an opportunity to take a big bite on investment support. If exports are the focus, then there should be a large slew of concessions to the exporting industries. If on the other hand, domestic consumption is the focus, the priiority should be automobiles, light engineering, textiles, pharmaceuticals and fast moving consumer goods. It is important to pick a winner, and bet all on it.

Finally, GST needs to be cleaned up. The delays in implementing GST 2 and 3 are allowing large leakages of revenue to happen. These must be plugged before they become endemic. These are well within the means and purview of the coming Budget, and the economy looks robust enough to take advantage of these measures to record higher rates of growth.

Dr S. Narayan is a former Union finance and economic affairs secretary. He was also economic advisor to Prime Minister A.B.Vajpayee