India's economy is now riding a roller-coaster

Even the political surgical strike “integrating” Kashmir failed to divert attention from the woes of investors, employees and entrepreneurs — all of whom are stuck with a similar malady: poor returns.

Why has the fizz gone out of the economy? Two alternative viewpoints suggest themselves. One is the view fingering “deficiency in structural reforms”. The mantra is to liberalise agriculture, land and labour markets. In theory, this is good advice.

Assume that all three reforms happen, and agricultural growth increases from three per cent per year to a high of six per cent per year. The net addition to national GDP will be of around one percentage point. This is no small beer even if you are growing at 10 per cent. But at a lower growth rate of five per cent, it significantly boosts growth by 20 per cent.  

The problem is that no political economy sensitive plan to implement these reforms has emerged. The BJP’s primary objective remains sustained pan-India political dominance. Consequently, economic reforms have to be of the “win-win” type, fetching benefits in the short term — within three years. This is difficult because all three reform areas are state government subjects, which stretches out the decision-making. Also, reform involves junking administrative controls — subsidising the market price at which cereals are bought from farmers by government agencies and fertilisers, electricity and water are supplied to farmers.

In June this year, the government constituted a high-powered committee for transformation of agriculture, chaired by the Maharashtra chief minister and including eight other CMs and the Union agriculture minister. This is encouraging, but insufficient. The Centre should use its convening power to constitute a council — on the GST template —except that this one would consist of the chief ministers and be chaired by the Prime Minister, since the issues are intensely political. Going through the “committee” route will take forever.

A similar deficiency of soft structural reform exists with respect to the poor quality and access to education and health, which imposes social and private net costs. But assume all of India becomes like Kerala. What would that change? Would we be able to export skills like Kerala does and who would accept 100 million expatriate workers? Admittedly, the argument has merit beyond economy efficiency to the core concept of equity. But we must not willingly lull ourselves into choosing soft targets like skill development. The problem is not skills. It is non-existent jobs, which in turn are tied to our closely regulated, bureaucratic economy.

On bureaucratic reforms, short-term correctives don’t exist. There is however, some, albeit scattered evidence, that a growth-oriented bureaucracy is being “considered”. However, the crashing fortunes of a competitive, telecom industry and continued unviability of electricity utilities remain stark illustrations of poor public governance.  

This brings us to the second argument which fingers cyclical downturn.  Till 2008 it was believed that India had successfully de-coupled from the global economy. Today, we appear to have locked onto a vacuum sealed coupling.  Stagnant exports, low corporate investment and sticky demand mirror international woes. We are, however, coping.

The RBI has reduced its repo rates by 1.1 percentage points since December 2018. More-of-the-same can be expected if inflation remains low and the Federal Reserve listens to President Donald Trump and loosens up further. Reductions in the repo rate (at which the RBI lends to banks) help in building up operating margins for our battered banks even if they aren’t passed on to consumers. Forcing banks to do so, rather than rely on competitive pressure to cut margins, smacks of the kind of micro-management which generated the problem of stressed assets in the first place. Balancing risk with reward must be a decision taken within bank and corporate boardrooms.

It’s not as if all of India’s corporate sector is shackled by debt overhang. But deleveraging will constrain credit-off take in the near term. Reliance Industries, India’s second most valuable company (August 2019), plans to liquidate debt of '1.6 trillion over the next 18 months via stake sales, partnerships and monetisation of assets.

Business is now looking to the government to kickstart the economy. The constraint is low resources. Trying to increase our tax-to-GDP ratio, particularly with a shrinking tax base, is a self-goal. Our best option is to squeeze revenue spends in areas other than key human development and social sector schemes. Reworking the Budget envelope realistically can provide the framework for doing so.

This year’s Budget grossly inflated the tax base (previous year’s net tax receipts) at Rs 14.8 trillion, as against the authentic provisional estimate of the Controller General of Accounts of Rs 13.2 trillion. Second, nominal GDP growth will probably not exceed 9.5 per cent — six per cent real plus 3.5 per cent inflation — as against the budgeted 11.5 per cent. Tax receipts are also unlikely to grow at the budgeted 13 per cent.

Junking our targeted fiscal deficit of 3.3 per cent this year is appropriate. A more likely target is 5.5 per cent of nominal GDP. This can create fiscal space to liquidate the off-Budget liabilities — delayed payments to public sector agents which execute government programmes — from the previous year.

Making the Budget targets credible might also persuade the taxman to stop terrorising existing taxpayers. Limiting the revenue deficit to two per cent of GDP despite the reduced tax receipts and reallocating the cash flow towards quick turnaround infrastructure spends for boosting agriculture and reducing the transaction costs for exports serves multiple objectives. It dilutes barriers to growth; boosts incomes in the bottom two quintiles and allays fears that additional debt is being wasted on current expenditure.