India seems to have left the worst behind, having tread uneven terrains and valiantly recovered from the reverberations of demonetization and roll-out of the Goods and Services Tax (GST) regime. The recently released Economic Survey asserts that FY18, with its muted growth of 6.5%, is a one-off and the country is on its way to structural recovery, heading towards a familiar 7-7.5% GDP growth the year after. With Finance Minister’s Budget Speech due in less than a day, all stakeholders - be it the industry, the investor community, and citizens across the spectrum - keenly await the government’s plan to execute a revival forecast by most commentators. The distinguished table of IMF, World Bank, Moody’s, WEF, and now our own Economic Survey agree on one point – India has been through its share of disruption, but all of that is behind us.
But is it? The same Survey carries some grim messages. The threat of rising oil prices, subdued private and public investment, an overall drop in savings, and a general slowdown in both agriculture and manufacturing, the former thanks to stagnant wages and pricing pressures, while the latter courtesy the NPA challenge plaguing the banking sector.
Side stepping one’s tendency to let negativity carry forward the narrative, let’s take stock of things which went well.
The biggest economic event of the year happened on July 1, 2017 with the introduction of the GST. According to me that is also the biggest positive. Yes, it has translated into multiple rates and cesses with countless footnotes and exceptions regularly undergoing harmonisation, yes the technology platform is far from perfect, and yes it has led to a higher compliance burden especially for small businesses. But, bringing 29 states with wide disparities of economic development under a common umbrella of revenue accrual is no mean feat. Using input credits to counter double taxation and ensure compliance in a country where tax evasion is rampant will not go well with most. No one embraces change and it takes tremendous political will and courage to mobilise any. Previous governments may have envisaged or opposed the framework, but it is this government which has executed it. And this very act nullifies their precedent actions (which may have been against GST when they were in the opposition) as mere political role-play.
Second positive is the wide variety of measures to tackle the Non-Performing Asset (NPA) debacle afflicting India’s banking sector, both in terms of the Insolvency and Bankruptcy Code (IBC) cornering defaulting promoters, and the recapitalisation plan relieving bank balance sheets. IBC is still a work in progress, jurisdictional confusion is prominent, there are double standards for treatment of some defaulters vs. the others, and recapitalisation sans adequate governance standards for both creditors and borrowers would at max serve as an ad-hoc solution. But for the first time, power dynamics are being re-aligned, courtesy a structured time-bound (albeit not perfect) process for resolution.
Third big positive, I dare say, are the number of retail specific interventions – enhancing financial inclusion through Jan Dhan Yojana, with over 300m bank accounts as at Dec 2017 and a sharp reduction of zero balance accounts; over 74% coverage of sanitation facilities for rural households with high usage; a strong and real push towards affordable housing and crop insurance to name a few. These initiatives, directly and indirectly, have the potential to enable significant economic change and the government should rightly continue to iterate and execute, spot and resolve operational and policy gaps where required.
Moving over to losses and lessons to be learnt – demonetization has been nothing, but hubris reinforced by political gains to be eventually muted by economic realities! Its narrative was mid-implementation amended from ‘an executive action to weed out black money’ towards ‘being part of a grander plan to steer to a Digital India’. Data from various agencies including the RBI only point towards its failure to tackle both. Yes, perhaps marginally more people refrain from using cash…but crediting demonetization vs. much simpler and piecemeal actions which followed (i.e. limits on transactions and withdrawal), is plain disingenuous. Such “bold” experiments, should they repeat in future, must pass tests of the most stringent nature before being tabled.
With demonetization thankfully behind us, the most fundamental area of concern would be the sizeably reduced role of private sector industry (corporate, infrastructure, industrial) and agriculture within India’s economic performance, both in absolute as well as proportional terms in recent years (e.g. as share of GDP or GVA growth). The economy has been chugging on wheels of consumption and public expenditure, which is not sustainable.
The slowdown in private sector industry has a spill-over effect resulting in reduced investment, muted exports, and diminished demand for imports. Part of it may be driven by a locked credit cycle on which the government is already working (i.e. via IBC and bank revival), but the other part is more structural and demonstrates the failure of schemes such as ‘Make in India’, and inability of the system to facilitate land and labour acquisition and capital access. The government’s spending focus on road building, ports, electrification etc. are noteworthy, but they don’t represent a bottom-up improvement in manufacturing capabilities and competitiveness.
While rural India is surely on the radar, courtesy the government’s successful social-economic drives, agriculture needs to be the second area of focus. Reducing dependencies on monsoons (only 35% of cropped area under irrigation), increased access to farm credit, improving crop price competitiveness to reduce wage stagnation, are big problems to solve – each appropriate to go through an accelerated ‘cooperative federalism’ mobilisation, the akin of which we saw in GST.
A comprehensive review of the above is expected and perhaps warranted from tomorrow’s speech.