I read a very interesting interview with Jahangir Aziz, the chief economist for the India operations of JP Morgan, who had earlier been the principal economic advisor in the ministry of Finance. He pointed out that corporate investment has barely budged since 2012 at around 12% of revenue, which suggests that Indian companies are not investing; clearly, they don’t see adequate, let alone growing demand.
Sure, there was the occasional flurry of demand, like the one after the cut in goods and services tax rates right before Diwali, but, more generally, demand has been slowing, as a result of which companies are unable to increase prices. This is evidenced by the fact that core inflation has been declining for 25 months despite healthy to respectable growth numbers. It seems obvious that the economy has been suffering because of the government’s conservatism and its extreme fiscal austerity. It is more than time that the government opens its eyes to the real picture and provides some well-targeted fiscal support.
While there would be many possible windows to support the economy fiscally, I believe a key area that should be targeted is transportation costs, which are much too high in India, often accounting for well over 5% (10% in some cases) of the selling price of goods. I was surprised to read that India exports diesel to Bhutan at around Rs 70/litre, while the domestic price is Rs 90/litre; with domestic demand at around 220 crore litres a day, this tax on transportation costs works out to about Rs 16 lakh crore a year, more or less equal to the current fiscal deficit.
If the government were to reduce this tax by, say, 10%, it would deliver savings of about Rs 1.6 lakh crore to businesses, and importantly, communicate that the government understands some of the choke points constraining the economy. This would also improve profitability which, in turn, would increase tax revenues, reducing the impact on the deficit.
To be sure, the deficit would rise—by about 0.4% (taking it to 4.6% from the forecast 4.2% for fiscal 2027)—but, with core inflation well within the Reserve Bank of India’ target of 4%, it may not result in the need for any monetary tightening.
Indeed, I would say that there may even be room for additional fiscal loosening (by, say, another 0.2% of GDP, or Rs 80,000 crore), which could be directed towards improving health and education outcomes.
Another issue highlighted by Aziz is that the fact that corporate investment has flatlined for 13 years suggests that the economy’s problems are structural and not amenable to quick cyclical fixes. His thinking is that—akin to the situation in most other countries—the problem is related to the fact that since 2008, there has been very little churn in the market leaders in most sectors; this has been highlighted by another smart analyst, Ruchir Sharma.
My take on this increasing power of large companies is that it points to a failure of capitalism, which is supposed to evolve through creative destruction. In the current global environment (and in India), large companies accumulate more political power and are able to drive laws and regulations to where they get fatter and inequality goes through the roof. Perhaps with Donald Trump getting seemingly more unpredictable by the day, a systemic explosion is on the cards.
But returning to what our government needs to do, in addition to loosening the fiscal spigot, I believe the key to turning the economy around is effective communication-first off, acknowledging that the government understands that the economy is stalling and that fiscal incentives to the corporate sector need to translate into investment. It is time to recognise that the rah-rah attitude is actually counterproductive—being the third-largest economy in the world means nothing to the poor who continue to suffer under one of the lowest per capita incomes in the world, or, indeed, to investors—both domestic and international—who look at things dispassionately.
Indeed, this kind of openness would likely sit well with foreign investors—both direct and portfolio—who have been backing away from India, which has resulting in huge outflows and the almost unmanageable pressure on the rupee. Turning this around could lead to a sharp reversal of flows, which could return the rupee from the hugely undervalued depths it has been plummeting.