Quick-fixes may provide temporary relief, but cannot resolve underlying structural problems in several sectors.
By Barendra Kumar Bhoi
The adverse effects of two consecutive shocks—demonetisation and goods and services tax (GST)—have receded. The real economy is poised for a convincing recovery from the third quarter of FY18. Nevertheless, headwinds are clearly visible on several fronts. International prices of crude oil continue to remain elevated, around $65 per barrel, which is the biggest risk to India’s balance of payments as well as domestic prices. Turnaround in the global interest rate cycle may gather further momentum following normalisation of the US monetary policy. Protectionist attitude of many systemically-important large countries may constrain the growth of global trade volume going forward. In the domestic front, agrarian distress has been worsened, particularly due to distress sale of farm products. Private investment is yet to pick-up, with capacity utilisation below 75% at the aggregate level. The services sector is gradually adjusting to the GST shock. Banking sector is still reeling under massive NPA problem despite large bailout initiative announced by the government. Recapitalisation and resolution process have to be handled carefully without hurting the industrial recovery.
Under these circumstances, expectations from the FY19 Budget are high. The populist groups have been suggesting soft options like low interest rate, farm-loan waiver, government procurement, food subsidies and fiscal stimulation. These quick-fixes may provide temporary relief, but cannot resolve the underlying structural problems persisting for quite some time in several sectors. The Centre has been pursuing wide-ranging structural reforms to make the economy flexible, self-sustaining, and more productive in the medium-term. The forthcoming budget should reflect government’s determination to carry-forward these structural reforms to their logical end without being distracted by populist demands, which typically gather momentum towards the end of an electoral cycle.
The government has received rich dividends so far from its endeavour on fiscal prudence. Fiscal consolidation strengthened macroeconomic parameters and attracted large FDI on a sustained basis. If the government succumbs to political pressures on farm-loan waiver, food/fertiliser subsidies, etc, and deviates significantly from the path of fiscal consolidation, the hard-earned price stability, strong external balance, and improvement in the sovereign credit rating shall get squandered away quickly. Agrarian distress in India is deep-rooted and, therefore, needs careful attention. Farmers are currently up in arms to demand loan waivers, which is anyway a sub-optimal solution. Instead of loan waivers, the government should quickly remove middlemen in the agricultural value-chain. The electronic national agricultural market (e-NAM) is yet to make any significant dent on this front. The e-NAM initiative needs to be implemented throughout the country on a war footing. Farmers should be ensured remunerative prices.
Moreover, the government may consider introducing a composite crop insurance scheme under Pradhan Mantri Fasal Bima Yojana to cover both crop failure and market failure so that farmers can be protected against distress sale. This is a popular, but not populist, measure to ensure remunerative prices to the farmers, similar to the return received by milk producers. A large chunk of the budget exercise on indirect tax proposals has been taken over by the GST council, responsible for rationalisation/fine-tuning of GST. Budget FY19 should showcase the government’s commitment to bring items like petrol and diesel under the ambit of GST at the earliest. Moreover, the government has to strengthen the GST administration so that its benefits reach the common people. Procedural hassles faced by the traders/producers have been largely addressed. However, GST-success ultimately lies in consumer-protection, which the budget. National Anti-Profiteering Authority has to be supported by ground-level bureaucracy to enforce GST rules and prevent non-compliance. The informal sector of the economy is shrinking following demonetisation and introduction of GST. Quite a sizeable chunk of small borrowers, particularly in the SME sector, who were depending on the informal sector, find it difficult to obtain funds from the formal sector.
Pradhan Mantri Jan Dhan Yojana (PMJDY) has been successful in opening bank accounts, but basic banking services are not available to them due to lack of physical presence of banks in rural areas. The business correspondence model is not working well, at least for lending activities in rural areas. For every 1,000 PMJDY accounts, a brick-and-mortar bank branch is needed in unbanked areas so that lending activities would pick-up in those areas. As the government is committed to spend large amount for rural development, rural people shall earn income on a regular basis. Therefore, they need continuous banking services, which would make rural branches viable. If commercial banks do not like to grab this opportunity, new generation banks may come forward to fill the gap. The budget may provide an incentive structure for opening rural branches as the technology-driven solution under the BC model is dysfunctional. This may turn-out to be a major structural reform benefiting poor people without being populist.
The large segment of the services sector is not represented in the CPI basket and, therefore, services inflation is not fully captured in the overall CPI index. For example, education, healthcare, recreation/entertainment etc, have become highly expensive. After the introduction of GST, these services have become even dearer. The government should innovate ways to provide relief to consumers of these services. If necessary, it must regulate the pricing of these services through regulatory agencies. Digitisation is an integral part of structural reforms. This would help improve compliance, check corruption, and shrink informal economy further. Despite persistent endeavour, progress of digitisation in India, particularly in the rural areas, has been un-impressive. In fact, digitisation push, provided by demonetisation, seems to be slowing down. Expectations from the budget are high for digitisation to achieve last-mile connectivity through robust infrastructure, particularly in rural areas, uninterrupted power supply, competitive fee structure, data security and above all digital literacy.