The key agenda must be to accelerate growth

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The key agenda must be to accelerate growth

Only a fast-growing economy can generate surpluses needed to create jobs and sustain social safety nets


Why in news?

  • Now that the general election is over, the time has come to pay serious attention to the economy. Although the Narendra Modi government reformed indirect taxes, brought in a new bankruptcy code and demonetized high value currencies to stamp out corruption, Asia’s third-largest economy is now slowing down.

Current economic scenario

  • Cyclical downturn: The economy is going through a cyclical downturn. The GDP growth in the second half of 2018-19 had fallen to around 6.5% — below the trend rate of growth of India (7%).
    • Gross Domestic Product (GDP) growth figures for January-March, to be released on May 31, are expected to depict a loss of momentum in India’s growth.
  • Index of Industrial Production (IIP): A downward slide has already been seen in Index of Industrial Production (IIP), which contracted to a 21-month low of 0.1% in March on the back of weak investment and consumption demand.
    • For the 2018-19 financial year as a whole, IIP growth stood at 3.6%, much lower than 4.4% recorded in previous financial year.
  • Consumption & exports: Consumption demand, which was the bulwark of the economy, has weakened.
    • India’s slowing consumption story and subdued growth in exports are factors which are expected to keep the country’s growth rate under pressure in the months to come.
  • Decline in investment rate:
    • Private investment is yet to show signs of a pickup: For faster growth, what is critically needed is a higher investment rate.
      • In current prices, the ratio of Gross Fixed Capital Formation to Gross Domestic Product has stayed low at 28.5% between 2015-16 and 2017-18.
      • In 2018-19 it is estimated at 28.9%. In 2007-08, it was as high as 35.8%. In constant prices, the ratio, has, however, shown a smaller decline from the peak.
      • It is true that for a time growth can come out of better utilisation of existing capacity.
      • But for sustained growth, the ratio has to go up, and that too substantially.
    • Fall in corporate investment. Every year the Reserve Bank of India (RBI) publishes a forecast of corporate investment.
      • It uses the data made available by banks and other financial institutions on the phasing of capital expenditures of projects sanctioned by them.
      • There has been a steady decline from 2,050 billion in 2014-15.
      • The industry-wise distribution of projects sanctioned by banks and other institutions in 2017-18 shows that the power sector accounted for 38.2% of the total expenditure.
      • Pure manufacturing had only a small share. All these point to the urgent need to accelerate investment.

Reviving investment

  • Public investment: First, much of public investment happens outside the Budget.
    • In 2019-20, capital expenditures of the Central government to GDP are expected to be 1.6%. This ratio has not shown much change.
    • The bulk of public investment comes from public sector enterprises, including the Railways.
    • A strong public investment programme can be a catalyst of private investment.
      • In a situation such as the present one, it can crowd in private investment.
    • Second, there have to be sector- or industry-wise discussions between the government and industrialists to understand the bottlenecks that each industry faces in making investment and take actions to remove them.
  • NPAs: Banks are under stress and the ratio of non-performing assets (NPAs) has risen.
    • We need to resolve this issue as early as possible so that banks can get back to lending at a significant pace.
    • In the absence of term lending financial institutions, banks provide both working capital and long-term loans.
    • That is why resolving the issue of NPAs is critically important for larger flow of long-term funds. The government must infuse adequate capital into banks at one go.
    • There are mechanisms such as resolution councils or committees which can help to resolve the NPA problem without the bank management coming under scrutiny of investigative agencies.
    • Over the medium term we should consider reviving the setting up of separate long-term financial institutions, partly funded by government.

Jobs and growth

  • Jobs: There has been great concern about the inability of the economy to generate adequate employment.
    • The answer to the problem of jobs is only growth. It is faster growth and faster investment which will generate employment.
    • The pattern of growth also counts. Some sectors such as construction are more labour intensive.
    • Sectors such as IT and the financial system, which provided attractive employment to young educated entrants to the labour market in the past, have their own problems.
    • But an improvement in the financial system may trigger some new jobs. Ultimately, it is overall growth which is key to more employment.
  • Adequate increase in demand: It is generally argued that growth will happen only if there is an adequate increase in demand.
    • Slowdown in rural demand: In this context, the main concern is the slowdown in rural demand, which can affect the off-take of consumer goods.
      • Agrarian distress, which is the cause of slowdown in demand, needs to be tackled on a priority.
        • Where distress is due to a fall in prices, the best course of action is to resort to limited procurement so that the excess over normal is procured by the government.
      • Increase in agricultural output: As far as increase in agricultural output in the short run is concerned, the monsoon is a big question mark.
        • Nothing can be done about it except changing the cropping pattern depending on rainfall.
        • But making available inputs such as seeds and fertilizers at an affordable cost must be the major task particularly of State governments.
      • Agricultural productivity: Over the medium term, more attention must be paid to increasing agricultural productivity through consolidation of land holdings and spreading better techniques of cultivation.
      • Agri-marketing: Improving marketing arrangements has been a neglected area.
    • Medium-term reforms: Coming to the medium term, reforms have been moving in the right direction.
      • GST: The introduction of the Goods and Services Tax is a major step. But glitches still remain in its implementation. The government should get tax authorities, industrialists, traders and, particularly, exporters to sort out the issues together.
      • IBC: The Insolvency and Bankruptcy Code was another significant step taken in the last few years. Even here there are some bottlenecks and the government must address them.
      • Land reforms: Land reforms which enable entrepreneurs to buy land speedily have been suggested. Some steps in this regard have been taken in the past.
        • Compulsory acquisition of land is the antithesis of competition and should be resorted to only in limited cases where public interest is involved.
      • Labour reforms: Labour reforms should wait until the economy has picked up steam and moved to a higher growth path. Only in these circumstances will there be less resistance. A lot more can be said on reforms.
      • Easing of liquidity: From this angle, while there is a case for some easing of liquidity, monetary policy should keep a watch on prices as there is no easy way to forecast the behaviour of crude oil prices or the monsoon.

Way forward

  • To conclude, besides economic factors, non-economic factors are also critically important to revive what are often described as ‘animal spirits’.
  • Investment today is based on expectations of future earnings.
  • Thus it is an act of faith in the future. For this to happen, there must be social and political tranquillity.

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