Structural Challenges For Modi 2.0

Structural Challenges for Modi 2.0

With the massive mandate that the National Democratic Alliance (NDA) got in the recent elections, there are also huge challenges ahead for the new government with regard to the economy. . As estimated , GDP growth is indeed below 7% for 2018-19. But the big concern is that the slowdown appears to continue even in 2019-20 and it is expected that the economy  grows at below 7% for the second straight year. Unlike in 2014, in 2019 the economy is facing significant headwinds. Some of them are: rising world oil prices, uncertainty in global trade, growth concerns in the world economy and gloomy monsoon predictions. While the slowdown follows global cycles to some extent, the new government may need to address the domestic challenges that are of short-term and medium-term structural in nature. There are several areas which need urgent focus by the government on economic front.


Increasing consumption

An ET survey of economists outside the government reveals an apprehension that the overall growth rate of the economy for 2018-19 would fall below 7%. The response should ideally not be confined to a rate cut by the central bank and directing public entities to invest more. As per the second advance estimate of GDP released by the Central Statistics Office in February, a growth of 6.5% would be required in the January-March quarter for the economy to achieve that growth rate of 7%. Leading indicators such as growth in the Index of Industrial Production, core sector growth, the purchasing managers’ index and cargo movement, besides the slump in automobile sales, suggest that growth in Q4 would, indeed, be below 6.5%.

"The recent signs of slowdown in the economy stem not only from slow growth in investments and subdued exports but also from weakening growth in consumption demand," FICCI said in a statement suggesting various measures the government could adopt in the next budget expected in a month. 

FICCI said the new government should cut corporate and individual taxes, expand a programme of handing 6,000 rupees ($86) a year to poor farmers to boost consumption demand and consider tax concessions for export-oriented manufacturers. 

The Confederation of Indian Industry, another industry body, said it was crucial to reduce the income tax burden and expand the scope of investment allowance to all sectors, while higher incentives should be given to exporters. 


Spurring Private Investment

Another task would be to draw in the private sector into infrastructure investment, stalled since the public private-partnerships of the UPA era turned sour. Lessons should be learned to formulate the right kind of contracts. Banks should be recapitalised and bad loan resolution completed. The bond market should be activated to fund long-gestation projects, with a bond guarantee fund to begin with. Political will is the key to get these things going. And that should be ample, given the renewed mandate for the Modi government.

Reconsidering the fiscal and monetary policy rules:

There is a need for improving the quality of public expenditures. More than this, any slowing economy needs fiscal stimulus through taxes that is easily reversible when the economy revives. On the monetary front, what is needed is policies that would encourage savings and not only narrow inflation targets. This is more so when interest rate cuts do not necessarily transmit to higher investments, which has been proved empirically time and again.


Restructuring and strengthening statistical system:

On the face of it, this may look a very minor issue for the government. But the fact that economic agents’ decisions depend heavily on reliable statistics, a robust statistical system becomes the heart and soul of public policymaking. Developments in the last one year or so do suggest that there could be issues, both computational and institutional, that appear to have dented the credibility of official statistics. Having a strong statistical system at an arm’s length of government machinery does more good to the government and the people than otherwise. Here, the recent proposal to merge the CSO and NSSO and create a new National Statistical Office does not address the current issues that Indian statistics is facing.


Rethink privatization of banks:

 There is so much clamour from very distinguished economists for more privatization (and mergers) of public sector banks. The new government may want to resist this for one reason. Among the many, the two most successful policy interventions in the last five years are Jan Dhan Yojana (JDY) and direct benefit transfer (DBT). If one looks at the role of the private sector in these two interventions, it is highly disappointing. The latest statistics on JDY suggest that private banks have only 3% of these accounts. The story is similar in the case of DBT and other government programmes. What is important here is to recognize that state-run banks do undertake huge social obligations and should not be compared with private ones. India needs more banks that provide services to the bottom of the pyramid.


Reducing or completely eliminating power subsidies

Growth prospects in 2019-20 should get a bounce from political continuity ensured by the outcome of the elections. The renewal of political authority should be used to push through some much-needed but unpalatable reform. One is asking people to pay for the power they consume, instead of giving power away for free or patronising theft.  India is poised to consume lots more power, with power lines having reached most places in the country. But distribution utilities are too broke to pay for power and so do not purchase power from generation plants, which are underutilised, some stranded. This has led to power projects turning insolvent and loans to power plants turning into non-performing assets. Once the power sector is turned around, it can fuel a wave of new agro-processing in rural areas, creating new incomes and jobs.