The major problem faced in the country is in the factor markets. It is time that the government came out with the law and regulations regarding land consolidation and leasing, to allow for non-exploitative contract farming.
The spectacular mandate for the BJP and the NDA government back in power for the next five years has brought in a lot of hope, that the new government will fast track the reforms agenda to accelerate growth and increase employment in the country. Congratulations to the new Finance Minister on her well-deserved elevation. She has the job cut out, to immediately focus on getting the sagging economy back on track.
Unfortunately, the timing of the assumption of reins by the new government has come with disappointing news on economic front. The last quarter GDP growth at 5.8 per cent was the lowest in the last five years. In addition, the unemployment rate at 6.2 per cent was the worst since 1972-73. The core sector growth at 2.8 per cent has shown a five month low.
The withdrawal of the Generalised System of Preferences (GSP) by the United States comes as an additional setback.
The growth estimate of GDP for 2018-19 at 6.8 per cent is lower than the 7 per cent estimated earlier, and is much below the 7.2 per cent recorded in the previous year. Since the last five quarters, the gross value added (GVA) has shown a systematic deceleration from 7.9 per cent in Q4 of 2017-18 to 5.7 per cent in the Q4 of 2018-19.
The agricultural sector has decelerated from 6.5 per cent to -0.1 per cent during the period, and the manufacturing sector recorded a low 3.1 per cent growth in the last quarter. On the demand side, the only functioning engine of growth seems to be private consumption. With substantial cut in the capital expenditure by the government to conform to the fiscal deficit target and with private investment not picking up, capital formation too is showing deceleration. Exports too have been stagnant and with the withdrawal of GSP; the prospects do not look very optimistic.
These formidable challenges also present great opportunities for the new government. On the agricultural sector, the government should unshackle the subsidy-transfer syndrome and embark on big bang reforms. On agriculture, in addition to the prevailing distress, there is a lurking fear of a subnormal monsoon. The Skymet predicts the monsoon at 93 per cent of the long period average and the IMD prediction is 96 per cent.
Both point towards an uneven spread across regions. Therefore, the first priority for the government will have to be, to prepare itself for the bad monsoon situation and immediately unleash the reform agendum. The most important is the expansion and deepening of the crop insurance scheme—the Pradhan Mantri Fasal Bima Yojana. It is necessary to cover more crops and penetrate more regions. This should be done on a war footing and the final budget outlay should be increased substantially from `14,000 crore provided in the interim budget.
The time is also opportune to embark on the long awaited reforms in the farm sector. There is clearly a need for making a shift from consumer to producer orientation in policies, which implies, that the measures will have to be taken to reverse the worsening terms of trade in the farm sector. Frequent changes in trade policy must be avoided and quick exporting of surplus production should be facilitated. The subsidy regimes should give way to investment in agriculture.
Distorting policies, such as enforcing stock-holding limits and frequent export bans should be corrected. Repeal of Essential Commodities Act and breaking the monopsony from Agricultural Produce Marketing Committees too are important. In fact, policy focus in enhancing investment in storage, processing and marketing, and timely information on both input and output prices to the farmers through up-scaled extension will help them to enhance their yield and get remunerative prices.
The GDP growth in the manufacturing sector has shown a sharp deceleration in the last quarter to 3.1 per cent. The capacity utilisation in the industrial sector is at an all time high, and that means, additional growth will have to come from additional investments. The gross fixed capital formation (in constant prices) has declined from 33.4 per cent in Q3 to 30.7 per cent in Q4. Therefore, acceleration in growth of manufacturing requires changes in the investment climate. The twin balance sheet problem is still a major factor.
There is considerable laxity in the bad debt resolution process after the Supreme Court struck down the February 12 circular, and the RBI had to postpone putting out a new circular due to the Code of Conduct. Now that the elections are over, the revised circular should be put in place quickly so that the process is activated.
The real interest rate in the country is extremely high and perhaps, MPC should make a substantial reduction in the policy rate instead of a token reduction of 25 basis points. The transmission of lower policy rate will depend on liquidity, and that has dried up mainly, due to virtually complete appropriation of household sector’s financial savings through large public sector borrowings of over 9 per cent of GDP.
Is there a scope for fiscal stimulus? It is reported that there has been no further slippage in the fiscal deficit from the revised estimate of 3.4 per cent presented in the interim budget. However, this has been achieved with considerable off budget borrowing and creative accounting. Any further laxity would only hurt the revival of the private sector. However, one important window for increasing capital expenditure for the government is to activate strategic disinvestment.
The NITI Aayog has done considerable work in identifying the companies for disinvestment and the government should start the process by completely shedding Air India. Hopefully, it will muster the courage to overcome the stalling process by special interest groups. Active disinvestment process will buoy the markets and will make the process smoother.
The major problem faced in the country is in the factor markets. It is time that the government came out with the law and regulations regarding land consolidation and leasing, to allow for non-exploitative contract farming. Similarly, land acquisition has been a major problem for expanding highways.
Relaxation of labour laws has been on the table for considerable period, and with such an overwhelming mandate, this is the time to impart flexibility to the labour market to enhance labour intensive industrialisation and exports.
Another immediate area of action is to fast track the negotiations with the US to regain GSP in trade. The protectionist stance for “make in India” is self-defeating as India’s experience over the years has shown, and after a concerted effort at dismantling the protectionist regime, the last few years have seen some reversal.
Our current account deficit is not too large and the oil prices, which claim a bulk of imports, are relatively stable. This is the time to dismantle and show seriousness on our negotiations with the US to win them back. Surely, with such an overwhelming mandate, the time is opportune to walk the talk of being a reformist government.
(The author is Chief Economist Adviser, Brickwork Ratings and Counsellor, Takshashila Institution. Views are personal)