After dragging the economy into a trough, the government is now contemplating ways to pull things about. Before commenting on the various measures that it is contemplating to kick-start the economy, let us go back in time to what the Narendra Modi government had inherited and see just how things have got progressively worse.
Modi was handed a crippled market with a non-functioning bureaucracy, non-functioning banking strategy, a crawling rural economy and also a reluctant private sector. Cut to the current scenario and we’ve got a partly functional lobby, an all-but-dead banking program, a rural market that borrows and refuses to pay, come rain or fair weather, and a zonked private sector that doesn’t know what hit it. That’s the picture that recent headlines paint.
More color was added following the recent pair of GDP amounts which saw the market slipping to some three-year low just as petrol prices touched a three-year high (despite global crude prices halving, but that’s another story).
With no explanation in the hand, the Modi government did what authorities typically do, call a meeting. Media reports suggest that strategies are being worked out to get the economy on track. But are they enough or just a case of old wine in new bottles?
The government is considering increasing spending by Rs 40,000 to 50,000 crore, say reports. These are tentative numbers because the Finance Ministry is reportedly not comfy with a broader fiscal deficit.
However, when a patient in the ICU requires oxygen, one needs to not haggle over the price of the cylinder. Just a little slippage is easily retrieved in subsequent years as the increased tax base due to demonetisation and GST will help refill coffers faster. Not spending money now can be fatal. Further, there are means through which the authorities can raise funds — it still has only under six months prior to the year ends.
One such measure that has been discussed in the meeting was that the disinvestment of Air India. In his budget speech Finance Minister Arun Jaitley had set a target of Rs 72,500 crore from divestment but till date has managed only Rs 15,000 crore. The government has space to speed up its divestment procedure.
The poor health of banks, which resulted in the nearly freezing lending, has been the biggest reason for the present mess. A large area of the blame needs to be placed on the government for not diagnosing the severity of the problem and applying an ointment on an injury that warranted an amputation. Even in the budget, the FM provided for just Rs 10,000 crore to capitalise banks, that are sitting on non-performing assets worth Rs 6.41 lakh crore.
Just capitalising the banks will only purchase time: The banking system requires a long-term solution to survive first and help revive the market afterwards. This is really a long-drawn process which could take years.
Among steps which are being considered and ones who can bring quicker relief are stimulus measures to improve exports, provide relief to SMEs and push investments in rural infrastructure and affordable housing. None of them may take off unless GST is operational, which is still a couple of months off. Reports say that GST is causing a enormous requirement for working capital as the government is still trying to figure out the refund process.
While the government is working on smoothening the GST procedure, there are areas where it can focus its attention and get faster results. One is in rural spending. While the government has to be credited for using MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) funds effectively, its portion as a proportion of GDP has come down from 0.6 percent in FY10 to 0.28 percent in FY18 (projected). Allocating and spending additional funds on improving rural infrastructure could result in more money in rural India that could drive demand.
Exports, especially the non-IT ones, have to be incentivized and fast. GST’s teething problems have come at a time when festive demand was driving peak season. Relief for exporters will be directly reflected in the GDP.
Finally, the government will need to help incentivize consumption that has taken a hit. As the central bank may or may not assist the authorities despite the downturn, on account of its fixation with inflation, the government will have to find ways to drive consumption. One way of doing it is to create more jobs, at least in the government sectors. One hears reports of a lack of doctors, police, teachers, and administrators in various government departments. It will help to fill these vacancies fast as this would have a multiplier effect on the market and increase consumption.
With the impact of the Pay Commission and one-rank-pension wearing out, the authorities will have to find different ways to put money in the hands of individuals to bring the market on track.