The damage from demonetisation and GST is slowly coming undone, but business sentiment remains subdued.
Achche din may be several years away, but the NDA government under Prime Minister Narendra Modi must get full marks for trying. Four years into the government’s regime, the economy is not exactly rocking. GDP has clocked in at an average of 7.3% annually between FY15 and FY18, below the 7.5% notched up in the five years prior to that. Manufacturing is muddling along, but exports are in a shambles leaving private sector investment stagnant, and few jobs on offer. The damage from demonetisation and GST is slowly coming undone, but business sentiment remains subdued.
However, two reforms—the resolution of non-performing assets via the insolvency and Bankruptcy Code (IBC), and the GST—must go down as game-changers. The NPA crisis, the making of the UPA regime which failed to implement policies, was hobbling the economy, as was an over-leveraged corporate sector. To its credit, the NDA has shown the political will to back the Reserve Bank of India (RBI) in its efforts to clean up the banking system. This, together with the increasing formalisation of the economy, and the progress on direct transfers will ensure growth is far more inclusive.
But, sustainable growth of 7.5%-8% could be several years away. Much of the government’s capex has been restricted to roads and railways; a record Rs 1.3 lakh crore was invested by Indian Railways in 2017-18. However, with about a fourth of capacity un-utilised, most companies over-leveraged, and interest rates on the rise, there has been little investment by the private sector, save for a big chunk in telecom. Not surprisingly, gross fixed capital formation has stagnated at 28.5% of GDP in the last three years.
The silver lining is that the distressed assets, being sold via the IBC, will be salvaged, and jobs protected. This is critical at a time when employment opportunities are limited. In the absence of easier labour laws, and competitive wages, industry has been reluctant to hire; on the contrary, there is a move to mechanise operations. Worse, high wages have hurt exports which have collapsed, especially from labour-intensive segments, at a time when global trade has been recovering. In the last four years, exports have posted an average -0.2% in growth, compared with 14% in the preceding five.
While the government started out wanting to tighten labour laws, it has pulled out amendments to the key ‘Labour Code on Industrial Relations’ that would have allowed companies to retrench up to 300 workers without permission. Instead, more populist changes—mandatory minimum wages and other benefits—are being pushed through. The strategy is clear: at a time when few new jobs are on offer, do not upset the existing workforce. FDI inflows have been robust, but the bulk of this has come into the services sector leaving the much-hyped ‘Make in India’ programme pretty much a non-starter. The share of the manufacturing sector in GDP has barely budged from an average of 17.3% between fiscals 2012 and 2014, to an average of 17.9% in the subsequent four years.
The upshot of a middling performance in manufacturing, and a poor performance in construction—both sectors that generate the most jobs—is that unemployment remains elevated. There has been a lot of debate on job creation with some studies—based on EPFO data—claiming 45 lakh new jobs were created in FY17, and 55 lakh in FY18, and the labour bureau data putting the number at a tenth of these. The truth is probably somewhere in between but, as DK Joshi, the chief economist at CRISIL points out, the faster-growing sectors are unlikely to have offset the loss in employment arising from the slower growth of the labour-intensive sectors.
Unfortunately, agriculture too has done poorly under Modi with growth slowing to 2.4% between FY2015 and FY2018, from 4.3% between FY10 and FY14. While two droughts can be debilitating, the government failed to anticipate the distress of farmers who are not able to command a price for their produce in the wake of surplus outputs and falling inflation. To be sure, it is not the entire rural economy that is stressed, but only the smaller agricultural segment. However, this is an important political constituency, and the government has given in to the demand for loan waivers. The cost, now estimated at over one lakh crore, will not just deplete states’ coffers, but it will also bloat the consolidated deficit, crowding out private investment.
Even as the pulls and pressures from upcoming state elections, and a general election in 2019, threaten to make the government more populist, the impact of the government’s financial inclusion agenda will go a long way in making life better for India’s poor. From subsidised LPG under the Ujjwala scheme, which now has 40 million beneficiaries, to low-cost accident, crop, and health insurance, the country’s underprivileged have certainly got a better deal under Modi’s watch. A total of 13.4 crore low-cost accident insurance and 5.3 crore life insurance policies have been sold so far. 5.7 crore farmers have been covered by vastly subsidised insurance; and Rs 2.9 lakh crore has been transferred to 30+ crore Jan Dhan accounts, a big relief in a country where up to 50% of social spending benefits never used to reach the intended beneficiaries.
The flagship housing schemes are also doing well as 3781397 houses have been constructed in rural areas and 443966 in urban areas, using generous government subsidies. And, though the details are still being worked out, an ambitious Modicare health insurance scheme for 10 crore households and MSPs-for-all-crops are also on the anvil. Not all these schemes are a good idea—unconditional cash-payments to farmers would be a better substitute for MSPs, and freeing markets is the best—but while achche din may be some time away, a start has been made in putting some of the necessary reforms in place.