Budget 2019-20: Eco Survey rightly argues policy shouldn’t create ‘dwarf’ firms as this hits growth & jobs, makes a case for sweeping reforms
Union Budget 2019 India: The Economic Survey 2018-19 prescribes an investment-led recovery for the economy, fuelled by high savings with a focus on the export market. This virtuous cycle is to spur job creation and help India clock an annual 8% growth rate, making it a $5-trillion GDP by 2025; the higher savings precludes domestic consumption as the driver of final demand. The blueprint is probably sound given it is based on the experience in other South Asian economies.
However, given the anaemic investments, flagging consumption and rising joblessness, this strategy cannot help pull the economy out of the trough it has fallen into.
Stimulating investment will be difficult at a time when capacity utilisation is just about 74-75% and the cost of capital is high. Without better visibility on demand, local entrepreneurs have little incentive to risk capital, especially when it is expensive. Whatever capital was available, has been put to work—there has been meaningful investment, in the last three years, through the M&A route, including the purchase of distressed assets via IBC. Consequently, today, there is very little equity capital left with corporate India to seed a project.
More critically, companies remain highly leveraged, so banks are going to be very cautious about lending to risky infra projects. It is hard to see much investment by the private sector for another three years, and given how the government is nearly broke, one doesn’t expect too much of a jump in the balance sheet capex; even if the government borrows off-budget, via infra bonds, it will certainly drive up the cost of capital and crowd out the private sector.
The Chief Economic Advisor made a good point saying foreign capital could be attracted since it is both cheap and available in plenty. But, for global corporations to be convinced about India, a lot more needs to be done, given many—such as oil explorer Cairn Energy—have burnt their fingers. So, regulation must be unbiased and irreversible, infrastructure markedly improved, and all contracts and court verdicts must be held sacrosanct.
Pampering local businesses at the cost of foreign players—as has happened in telecom—isn’t the path to growth, it merely causes precious capital and wealth to be destroyed, and thousands of job losses. The Survey has dwelt on the importance of policy being predictable and making business easy to do, unclogging the courts and so on.
These are not new ideas, but no government seems to pay heed. Critically, the government must ease the FDI rules to attract investments in new sectors such as multi-brand retail. Also, thanks to poor policies, raw materials in India are expensive; had miners been allowed to mine, for instance, coal, we would not need to import coal, which makes electricity unnecessarily expensive.
Slowing investment—project-starts in June are at a 15-year low, according to CMIE—is one of the fallouts of the deceleration in domestic savings. The reason household savings have slowed—from 23.6% in FY12 to 17.2% in FY18—is the slower growth in incomes. Moreover, as the Survey shows, the elasticity of consumption in India remains ‘very high’; aspiration rather than necessity, it would appear, is driving spending. Under the circumstances, it is hard to see household spends slowing unless it is due to smaller incomes. If that is the case, savings can’t grow either, and in fact, will decelerate further.
But, if the growth in personal final consumption expenditure slips, it would leave businesses with smaller surpluses to plough back and continue to take a toll on the job market. Already, only about a half-dozen of the large listed companies, of which two are IT firms, are seeing a growth in hiring. The need of the hour, however, is to create livelihoods for the masses, for low-skilled and blue-collar workers.
The Survey makes a great point on small firms: Policies today foster dwarfs—firms that hire fewer than 100 people—that are many in number but generate relatively much less employment and create little value addition. Small firms find it hard to sustain jobs they create whereas the bigger ones create permanent employment in good numbers. Consequently, incentives that help small firms—price preferences, no labour restrictions, loans through the priority sector quota—are altogether misdirected. The way forward is to phase out all size-based sops.
More important, restrictive labour laws need to be eased considerbably since these are choking businesses; the Survey notes how the changes made by the Rajasthan government have helped. In fact, rigid labour laws are one reason why promoters are holding back investments. The idea of a minimum wage, thus, will also drive up costs unnecessarily, making goods and services expensive and uncompetitive.
While the Survey is betting on exports to bring home the bacon, it must be pointed out that among the key reasons for India’s miserable performance on this front—and why countries like Bangladesh, Vietnam and Philippines are running away with what could be India’s spoils—is inflexible labour laws. Producers need to be locally competitive to fight in the global arena, but by pampering them with high import tariffs, the government has made them inefficient.
The other reason why India has lagged is the flawed policy of disallowing exports of several goods, especially agri-products. Reform has not been the hallmark of this government, it seems more inclined to populist measures. Which is why the Survey’s optimism on a pick-up in growth in FY20, on the back of private investment and consumption growth, is misplaced.