The global economy is experiencing serious disruption. The European Union is weak. Even Germany has not kept up its robust pace. The lack of a political union leaves the common currency (the euro) without the strong common fiscal and monetary policies it requires. The Chinese economy is declining. Vast internal debts of provinces and state-owned or controlled enterprises are one reason for the collapse of Chinese stocks. As the largest minerals importer, it was the growth engine for many countries. Canada, for example, is getting into a deep economic crisis because of a sharp fall in Chinese imports. The collapse in crude oil prices has now adversely affected coal as well. Oil price decline began with the shale oil discoveries and the consequent fall in American imports. Saudi Arabia encouraged oil price decline. The return of Iran as an oil supplier after the removal of sanctions has led to a weakening of Middle East economies. The decline in oil prices has resulted in cancellation of over $200 billion of expenditures in new oil wells. Japan is in an uncertain state for recovery. Russia is in trouble; its excessive dependence on oil exports is now worth a lot less.
Of the large economies, the US shows improvement. The dollar is a magnet for most countries and is getting much stronger. Inflows from unstable economies and currencies further strengthen the US economy. Indeed, the Federal Reserve is carefully considering raising interest rates.
There is another lurking danger, to the global economy. This is the state of banks and financial institutions. They lend with little diligence (as in 2008) the flood of money as countries use quantitative easing to revive their economies, at very low interest rates. And in India it is the state of nationalised banks and financial institutions; who lend with little diligence as also under government instructions.
India’s macroeconomic situation, however, is better. Low oil prices have greatly moderated inflation, though many items of daily consumption are experiencing price rise. Despite poor export performance, low oil prices have improved the balance of payments and the rupee is relatively stable. There is, as yet, no dramatic improvement in either public or private investments.
This is despite the Budget proposals for substantial infrastructure investments. The sales of two-wheelers and cars are not showing the expected rise. There is apparently a glut of ready urban housing. Almost half of power generation capacity is unutilised and a fourth of relatively lower priced power is not traded. Over 15,000 MW of gas-based power generation capacity is unutilised because there is no gas available. Most state electricity boards have accumulated huge losses but state governments will not permit adequate tariff recovery. They give away free electricity to farmers, of which a good part is stolen for urban use. Inter- and intra-state transmission bottlenecks prevent optimisation of supply with demand.
Fresh equity issues have yet to show good growth. Nationalised banks are in bad financial shape, due chiefly over the years to government-directed lending. Inaction over the years to plug hawala routes led to Mauritius and participatory notes becoming the major route for financial institutional investors. With the need for investment funds, the government is unlikely to plug these money laundering routes (a mere mention dramatically reversed FII inflows). The Prime Minister’s early trips to Japan and China have yet to result in significant inflow of promised investment funds.
It is against this backdrop that we must view the economic impact of the logjam in Parliamentary legislation. Three Bills must be passed urgently to stimulate the economy. First is Constitutional amendments to bring uniform goods and services tax which will ease the flow of goods across the country and add to GDP growth. Second and third are reforms to land and labour laws. In view of the inability of Parliament to function, there is now a suggestion to leave states to amend state legislation. These will be approved by the President. As these are concurrent subjects in the Constitution, a central law with states competing to make the law more attractive in their states is desirable. There are, of course, many other laws that need passing or amending to ease doing business in India.
A major problem, apart from the obstreperous Opposition, is the dire lack of talent in the central Cabinet. The home minister is inarticulate and better at threats than action. There is no sign of any attempt to improve the living and working conditions, training and equipment of police forces. There is no sign of administrative reform to identify individual accountability, provide guaranteed tenures to officers, put transfers, promotions, punishing, etc, of civil servants under an independent commission, induct specialists into governments, etc. Defence is yet to re-equip the armed forces.
As with earlier governments, there is no integrated agricultural policy, and no plan to build needed agricultural assets or rationalise agricultural markets. There is no attempt at integrated transport, energy, water or health policies either. There are different ministers and departments for all subcategories (for example road, rail, shipping, inland water) but little coordinated policy-making. Road construction is still mired in red tape and corruption. Private investment has been frightened away from most infrastructure investment because of delayed clearances, mess in power distribution, “levellised tariffs for 25 years”, etc.
Foreign policy appeared to be this government’s unexpected strength. But the initiatives have not translated themselves into benefits for the economy. The approach to Pakistan, for example, is confusing and ineffective. If the Pakistan civilian government is not able to deliver, why does our civilian government not deal with their army?
India is unusually poised to take advantage of a weak global economy. It is instead fighting internal political battles, with little finesse. Meanwhile, time is running out. Over 20% of its term is gone. The BJP government needs to win the coming state elections. If it does not, it will make little impact.
The author is former director general, NCAER, and was the first chairman of the CERC