After dragging the economy into a trough, the government is currently contemplating ways to pull things around. Before commenting on the various measures that it is contemplating to kick-start the market, let’s go back in time to what the Narendra Modi government had inherited and see how things have become progressively worse.
Modi has been handed a crippled economy with a non-functioning bureaucracy, non-functioning banking system, a crawling rural market along with a reluctant private sector. Cut to the present scenario and we’ve got a partly functional lobby, an all-but-dead banking strategy, a rural market that borrows and neglects to cover, come rain or fair weather, and a zonked private sector that does not know what hit it. That is the picture that recent headlines paint.
More colour has been added following the current set of GDP amounts which saw the market slipping to some three-year low just as gas prices touched a three-year high (despite international crude prices halving, but that’s another story).
With no explanation in the hand, the Modi government did exactly what governments typically do, call a meeting. Media reports indicate that strategies are being worked out to get the economy on track. But are they enough or only a case of old wine in new bottles?
The government is considering increasing spending by Rs 40,000 to 50,000 crore, state reports. These are tentative amounts as the Finance Ministry is allegedly not comfy with a wider fiscal deficit.
But if a patient in the ICU needs oxygen, one should not haggle over the price of the cylinder. A little slippage can be easily retrieved in subsequent years as the increased tax base due to demonetisation and GST will help refill coffers quicker. Not spending money now could be fatal. Further, there are ways by which the authorities can raise funds — it still has only under six months before the year ends.
One such thing 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 goal of Rs 72,500 crore out of divestment but till date has handled only Rs 15,000 crore. The government has room to speed up its divestment process.
Nevertheless, the big question is: Will the money be invested wisely in areas where the benefit is visible quickly?
One suggestion that has been reported is that the government is considering recapitalising banks. The poor health of banks, which resulted in the nearly freezing lending, has been the biggest reason for the current mess. A large portion of the blame needs to be placed on the government for not diagnosing the severity of the issue and applying an ointment on an injury that warranted an amputation. Even in the budget, the FM provided for only Rs 10,000 crore to capitalise banks, who are sitting on non-performing assets worth Rs 6.41 lakh crore.
Just capitalising the banks will only buy time: The banking system needs a long-term solution to survive first and help revive the economy later. This is really a long-drawn process which may take years.
Among measures which are being considered and ones that can bring quicker relief are stimulus measures to boost exports, and provide relief for SMEs and push investments in rural infrastructure and affordable housing. None of them may eliminate unless GST is operational, which is still a couple of months away.
While the government is working on smoothening that the GST process, there are areas where it can focus its attention and get faster results. One is in rural spending. While the government needs to be credited for using MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) funds effectively, its portion for 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 may result in more money in rural India that could drive demand.
Exports, especially the non-IT ones, need to be incentivized and fast. GST’s teething problems have come at a time when festive demand has been driving peak season. Relief for exporters will be directly represented in the GDP.
Finally, the authorities will need to help incentivize consumption that has taken a hit. As the central bank might or might not help the authorities despite the slowdown, due to its fixation with inflation, the authorities will have to find ways to push consumption. One way of doing it is to create more jobs, at least in the government sectors. One hears reports of a scarcity of doctors, police, teachers, and administrators in various government departments. It will help to fill these vacancies fast as this could have a multiplier effect on the economy and increase consumption.
With the impact of the Pay Commission and one-rank-pension wearing out, the authorities will need to find other ways to put money in the hands of individuals to bring the market on track.