Fighting slowdown: Govt needs a holistic approach to revive the ailing economy

Updated: September 6, 2019 7:35:30 AM

The slowing economy needs a holistic approach and not ad hoc measures. Policymakers must systematically remove hurdles in each and every sector of the economy

India GDP, global GDP, top economies, GDP growth slowdown, india currency, rupee, economic slowdown, india economyThe slowdown is reflecting on job creation, too. Unemployment hit a four-decade high of 6.1% in 2017-18.

By Aruna Sharma

The Indian economy is going through one of the most difficult phases in the post-Liberalisation era. Economic growth in the first quarter of this financial year (2019-20) has slipped to a six-year low of 5%. The manufacturing sector expanded by just 0.6%, while agriculture grew 2% and construction 5%. The inflation-adjusted GDP growth has slipped to 6.8% in 2018-19 from 7.2% in the previous year. Corporate results in each of the quarters reflect a slowdown in profit growth across all sectors, limiting the industry’s capacity to modernise or expand.

The slowdown is reflecting on job creation, too. Unemployment hit a four-decade high of 6.1% in 2017-18. The data showed that 7.8% of all employable urban youth were jobless, while the figure for rural India was 5.3%. Meanwhile, the working-age population—those above the age of 15—is expanding by 13 million a month. India needs to create 18.6 million jobs a year to ensure that the demographic dividend is not frittered away. Just to stay at the current unemployment levels, the economy will have to generate 8.1 million jobs a year, but the numbers are not very encouraging.

The RBI intervention and decisions by FM Nirmala Sitharaman may help generate demand. Definitely, there is no case of bailing out by giving packages, but to have a relook at systemic issues. It is more important to appreciate the gravity of the economic crisis at hand. Explanations dished out—the global slowdown and the cyclical nature of the crisis—will not help. The fact that India is growing faster than the US and China is no solace as these economies are growing at 3% and 6%, respectively, on a high base. On the cyclical nature of slowdown, RBI has rightly put a rider saying structural issues related to land, labour and marketing will need to be addressed on a priority by the government.

The slowdown is broad-based; it has affected manufacturing, trade, hotels, transport, communication, broadcasting, construction, agriculture—covering the entire economy. All analysts point to the need for long-term policies based on principles, and not just short-term measures to address the symptoms and not the malice itself. The Prime Minister is seized of the situation, evident from the concerns he raised in his Independence Day speech. The right approach is to have a long-term vision with short-term goals helpful in achieving the vision. So, what are the structural changes needed to make India an economic superpower? The first step is the realisation that the economy is in dire straits.

The course correction must come in systematic steps. It is important to move away from discussions whether unemployment is frictional (between jobs), cyclical/seasonal or structural. In India, the approach has to be structural as our requirement for job creation is 18.6 million every year and ensure that the young population doesn’t become a liability; it cannot be left to market corrections. The global slowdown cannot be a fig leaf as India is still a work in progress for social security, unemployment allowance and public healthcare. If India gets into the whirl of slowdown, the path to recovery will be much more difficult.

The stated objective of making India a $5-trillion economy by 2024 and $10 trillion by 2032 is a benchmark set by the government. Of the country’s total population, 65% is below the age of 35 who seek avenues for quality employment or enhancement. If the unemployment rate is the highest in 45 years and the growth rate is not up to the required level, we need to go back to the drawing board and set non-negotiable principles. Our approach to the cost of raw materials, power tariffs, credit availability, interest rates, labour laws and taxation needs clarity and long-term understanding. We need to converge the agreed principles and goals to enhance growth and create quality jobs.

As the PM rightly pointed out, the focus of the government should be on solving issues of labour layoffs and salary cuts in major sectors, and not on uncertainties in the share market or fluctuations in gold prices. The laid-off staff gets added to the ranks of job seekers, putting pressure to find quick fixes in the manufacturing sector, especially MSMEs, or vibrant services sectors such as tourism. Ad hoc solutions will not resolve the issue and we need decisive steps to gain the confidence of local and foreign investors that our policies are predictable.

The structural changes required are specific to each sector. For instance, mining—the only sector showing positive growth trends amidst the downturn. We need to take a look at the mining material cap on the cost-plus principle to ensure there is no profiteering by mining companies that will push input costs for manufacturing. The sector also needs to rationalise five types of royalties into a single levy to facilitate simplification.

Similarly, the guiding principle for imposing import/customs/safeguard duty should be to have lower or nil levies on what we do not have in India like coking coal, scrap and ferro nickel so as to bring down the input cost for the manufacturing sector. While mining shows positive growth trend, one needs to look at whether it adds to the input cost? The key is to differentiate between having normal profits and profiteering. There is a need to cap profits in input sectors such as mining and establish a ‘cost-plus’ approach. The same principle needs to be applied to other natural resources such as spectrum and minor minerals as these belong to the entire population.
Another area of focus is GST; a few items are still outside the GST purview and then there are multiple cesses. There is a need to collapse GST into two bands—maybe 5% and 12%—and rationalise the filing of returns. Tax payment can be quarterly, but paperwork should be made half-yearly.

This will bring confidence in industries and traders, and create the ground for self-declaration of taxes. The idea behind the GST was to widen the base for tax collection and for this reason it is important to come up with stable long-term tax rates and timelines before bringing more items under the GST regime. A related issue is insistence of current or different account for even businesses like consultancies. The efforts were done to collapse the multiple bank accounts, but GST and other requirements are not in sync with the same.

There is a need to revise minimum wages in both rural and urban areas. The convergence of the MGNREGA with Finance Commission grants will trigger infrastructure growth in rural areas. Urban areas should take up works of ward improvement of infrastructure using Finance Commission grants and other revenues. If Indore in Madhya Pradesh is getting the cleanest city tag year after year, it is because of efficient utilisation of available resources. There is no reason why other cities can’t replicate the effort.

Stepping up of agriculture production and value addition of farm produce as well as improving storage facilities will trigger local employment and ensure enhanced income in rural areas. For example, the round bamboo sticks for making incense sticks are imported. In the coming years, the entire activity can be indigenised by local cultivation of the bamboo of a particular variety required by the industry. Making of long-term consistent policies is the only way to success. The import of concentrates to make fruit juice needs to be reconsidered; value addition at the local level is key to long-term success of the sector and creation of well-paid jobs. Make in India has been successful in the steel industry because of the holistic approach adopted by the government and the industry.

The slowing economy needs a holistic approach and not a patchwork. The policymakers need to resist from pushing issues under the carpet and systematically remove the hurdles in each and every sector of the economy. While immediate results are possible in some sectors, others will take time to come up with sustainable outcomes. India needs to cushion its more than 1 billion citizens from global shocks and ensure that the population becomes an asset, not a curse.

(The author is a development economist, and former secretary, government of India)

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