Three quick economic steps the new government must take : 13-05-2019

There was a large economic problem to solve when India elected a new government in May 2014. There will be a large economic problem to solve when India elects a new government in May 2019. But broad contours of the problem are different. Government responses will obviously need to be different, too.

Before we explain this, a caveat: the analysis assumes that whichever government comes to power, its basic minimum economic goal will be to not let GDP growth slip below, say, the current 7% to 6.5% range. India’s economy growing at, say, a 5.5% to 5% range will be a disaster.

Assuming this basic minimum economic goal, let’s understand why the May 2019 problem is different from the May 2014 one. India’s most pressing concerns were largely macroeconomic in May 2014, while in May 2019, that mantle goes to microeconomic issues.

Most macro indicators were looking unhealthy five years back. These include growth, inflation, fiscal deficit and current account deficit. These look considerably healthier now. Those tracking the economy are now concerned about numbers that show reduced spending by consumers, and relatedly, the squeezing of consumer credit, flatlining incomes of the rural workforce, low price realisation by farmers, slimmer order books for infrastructure companies – that is, microeconomic issues.

Of course, macro and micro indicators don’t exist in separate bubbles. They are, in fact, outcomes of a single, highly complex economic system. Macro, to put it simply, is a sum of micros. And microeconomic problems, for example, may affect macroeconomic performance over time. In India’s case currently, since consumers are spending less and since consumption accounts for around 60% of India’s GDP, this particular microeconomic problem, if left unattended, will affect a major macroeconomic variable, GDP growth.

One macro indicator, private sector investment, which is the sum of micro investment decisions of businesses, deserves special mention. That’s because this has been pretty much in stall mode from before May 2014 up until now. And stalled private investment, whether at enterprise level or at the economy level, is a major problem the new government has to tackle during its term.

With the context – hopefully – clear, we will now ignore the bit about what Congress did wrong and what BJP did wrong, or who did better than whom, or whether or not indiscriminate bank lending during Congress time is a bigger medium term drag on the economy than BJP’s demonetisation.

Let’s look ahead.

Given worrying micro trends, what should be the immediate priority of the new government? Pundits will have many prescriptions. We suggest three big moves should be undertaken ASAP, all of them aimed at lifting sentiments.

First, the government should announce and seriously implement a big public asset sale programme. Second, it should, in consultation with RBI if necessary, make plenty of liquidity available to the financial system, especially to the now-stuttering non-banking finance companies (NBFCs). Third, it should simplify the goods and services tax (GST) system, with two top rates junked.

A public asset sale programme, selling shares of PSUs for example, will boost not just stock market sentiment, which is important, but also enthuse economic agents who make real economy investment decisions. Any major public asset sale by governments almost always produces this effect because the surge in financial activity induces a dose of optimism.

Plus, this will shore up government finances, allowing a course correction on slowing public expenditure on capital creation, for example, roads projects. That will address the microeconomic worry about slim order books for major infrastructure companies.

Revenue from asset sale will also allow the government elbow room for helping distressed rural/ agricultural economic agents. Recognising this is crucial because there’s no quick fix to India’s village economics.

NBFCs are a major conduit for consumer credit. For many reasons, starting with the implosion of IL&FS late-middle last year, this sector is under tremendous pressure. A further blowup will not just be a huge macro shock, it will likely savagely impact consumer spending. Infusing liquidity – and therefore confidence – in the NBFC system is a complex job. But it still should be done quickly, as this will be the quickest way to restore a degree of consumer confidence – through greater availability of consumer credit.

GST, a necessary reform, has been through several iterations already, and most informed observers reckon a few more are necessary. But given worrying microeconomic trends, months-long deliberations over rates won’t help. Quickly doing away with the two top rates of 28% and 18% – some items at the bottom end of the tax ladder may have to be moved up, given revenue considerations – will be a big boost to both consumer and business sentiment.

These three measures won’t address or won’t sufficiently address the economy’s structural problems. But, right now, a compounding of negative sentiments at the micro level is India’s most urgent economic problem. Once there’s a sentiment turnaround, the new government will be in a better position to address knottier issues.

If nothing is done to quickly reverse sentiments, the state of the economy in May 2024 doesn’t bear thinking.

Source : Financial Express

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