Winter is the time for warmth, for comfort and to enjoy the fruits of summer sweating. But that can be possible only when the state of the economy has the potential to offer quality of life and economic well-being for the community by opening up and retaining opportunities at various levels. Is the current state of the Indian economy capable of offering a sustainable and quality life, or are we living in an illusion and the economy needs a strong dose of corrective structural interventions to be on the right track?
Core sectors of the economy are showing discouraging figures, as is the domestic demand. Exports are down, jobs are not being created, fiscal deficit is under strain, revenue figures are far from target, external debt has increased, rupee hits a 27-month low, banks are struggling with NPAs and prices of essential commodities are beyond control, still the economy is shining. This is what the government wants us to believe.
The news of negative index of industrial production (IIP) and steep rise in retail inflation in November 2015 was least expected when the pundits were predicting a recovery path for the Indian economy, driven by the Make-in-India campaign.
India has moved up a few steps on the ease of doing business index, yet it tells only half the story. Investment in real figures is not coming. In fact, the main concern before our economy is drying up of investments, without which there can be no new jobs or incomes. Whatever investments are coming, they are there to tap the consumer potential of our economy rather than giving a boost to exports. In October last year, manufacturing activity eased to a 22-month low, owing to subdued demand, domestic as well as in the international market. The situation is unlikely to improve in the near future as big states like Madhya Pradesh and Maharashtra are witnessing slump in manufacturing activities. There is no systematic effort to attract export-oriented investment and infrastructure development. So, in the absence of an institutionalised arrangement, exports are slumping. With an anticipated 22% fall in the exports in 2015 compared to the previous year, exporters are surviving on the falling rupee against the dollar. Such a situation will not help the economy generate jobs for the 120 million unemployed.
Public attention should not be diverted by artificially-created and statistically-manipulated figures. If the economy is indeed shining, that should have been reflected in its expenditure and allocation models, which are showing otherwise trends. Even when the Indian basket of crude oil is at a six-year low, consumers are not getting any advantage, as the government is not passing the benefits to them. The sharp reduction in the petroleum import bill is sufficient to cover the Centre’s school education, child development, health and women related schemes, but the Centre has slashed its share of funds in 18 social sector schemes, particularly in education and health related sectors, including flagship schemes like Integrated Child Development Services (ICDS) and Sarva Shiksha Abhiyan (SSA).
In addition, employment generation schemes like MGNREGA, which has been appreciated by the UNDP as the best job guarantee programme, has been downsized. How the windfall gain is being utilised is not known to anyone. So, either the exact picture of the economy is not being presented before the public or, somehow, the government is failing to manage the economy. As the mid-term review suggests, the government is losing its grip over the direction and momentum of the Indian economy.
Despite sharp fall in crude oil prices, retail inflation and current account deficit are still high. It appears that an opportunity which must be seized is going to be lost. But, in the long run, an economy cannot rely only on the comfort factor of decline in crude oil prices. Every time the economy touches a new low, the government cannot shift its responsibility to RBI either. It has to take corrective measures. Exports need to grow at least by 10% to boost manufacturing and job creation. Consequently, domestic demand shall be strengthened and a positive cycle of growth can be restored. On the disinvestment front, the uncertainty over policy has to end. There has to be a transparent policy with unambiguous implementation strategy, otherwise the government will go on setting targets, only to miss them.
As far as the banking sector is concerned, RBI Governor has time and again cautioned against pushing financial inclusion beyond a point. The burden of bad loans is increasingly showing up and it appears the government is underestimating the gravity of the issue. Banks should not be unnecessarily exposed to sectors which have a proven track-record of stressed infrastructure or junk assets, otherwise accumulation of NPAs will significantly weaken our banking system. As correctly observed by Raghuram Rajan, sustained growth in India requires lifting people out of poverty, fuelling infrastructure investment and a rethink on economic policy approach. Foreign-capital-driven approach towards economic growth has its own dangers. To believe that FDI is the panacea for all the ills of Indian economy is naive.
Tax reform is another issue which is linked to investment. Two important measures, Goods and Services Tax (GST) and Direct Taxes Code (DTC) were initiated by the UPA government. However, the current government has almost shelved the DTC, and has diluted the GST. Such half-baked approach towards tax reform will not help the economy. The government should approach Parliament with an open mind and put forth a qualitatively improved legislation minus the flaws. For the sake of cooperative federalism, it is important that a constitutional amendment with far-reaching financial implications for the states as well is passed amicably and after political consensus.
Stress in rural incomes has become visible for over more than a year, and if immediate structural measures are not taken, the backbone of the Indian economy will be ruined. It is high time the government comes out of the denial mode and, instead of celebrating dubious data, works towards a credible solution. The challenge is to create conditions for faster economic growth, with adequate numbers of employment opportunities. Let economic management be emphasised over media management. If rural economy can be revived, it will give a major boost to private consumption, which holds out some hope to put growth drivers on track. The task may be difficult, but given the strong macroeconomic fundamentals, if the focus of policies, reforms and infrastructure are shifted to the right direction, results shall be favourable. The NDA government’s economic policy is lacking a human face, which is otherwise an essential ingredient of any public policy. I hope our learned finance minister will look into these aspects while preparing the Budget for the next financial year.
The author is a Supreme Court lawyer and National Media Panellist, the Indian National Congress. Views are personal