In 2019, a reformist Government was brought back to power and that, too, with a huge majority. This shows how electoral preferences are guided by economic expectations
Since the early 1990s, there has been a sense of optimism with regards to India’s economic progress. The process of liberalisation during 1991 brought with it a sense of hope regarding a dramatic turnaround in the country’s economic fortunes. While the nation’s growth did accelerate from the 1980s onwards, however, it wasn’t comparable to other emerging economies, including China.
The first decade of the 21st century was believed to be India’s time as it had a Government that was looking at the next generation of economic reforms. These transformations happened and the country witnessed the first serious privatisation of several public sector enterprises (PSEs) along with a drastic reduction in small savings rates. India’s macroeconomic situation was stable and gradually growth started to increase along with its investment rates. This growth continued till 2007, after which it started to lose steam due to lack of economic reforms and then the 2008 crisis hit the country along with the rest of the world.
While many thought the impact of the 2008 crisis wasn’t as much on India as elsewhere, the reasons behind this were the policy instruments which were deployed to address the risks that emerged. These instruments, combined with a lack of reforms and an entitlement-based regime brought a fresh macroeconomic challenge in the second decade of the 21st century.
Two decades have elapsed and India is yet to justify the sense of optimism that prevailed at the start of the century. But to be fair, the second decade wasn’t that bad considering that India’s growth in 2014, 2015 and 2016 was fairly decent even when one ignores the fact that it witnessed two successive droughts in 2014 and 2015. The country’s macroeconomic situation has improved significantly since 2014 and the Government has undertaken several reforms that will have long-term growth implications such as the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code (IBC) and the Real Estate (Regulation and Development) Act (RERA).
Despite these reforms, growth slowed towards the end of 2018 and throughout the first half of 2019. This has led people to question whether the third decade will be any different from the previous two decades. However, there are compelling reasons that point at how this time, it will be different. For starters, the current slowdown is not because of any inherent structural factors but is a direct outcome of the financial sector stress which spread over from banks to Non-Banking Financial Companies (NBFCs). The reasons behind the build-up of this stress are more to do with reckless lending during the first decade of the century as the attempt to fix it started only post the introduction of the Insolvency and Bankruptcy Act.
As the Reserve Bank of India’s (RBI) latest Financial Stability Report suggests, the Public Sector Banks’ (PSBs) Non-Performing Assets (NPAs) may increase by September 2020 and this poses fresh concerns regarding the ability of the PSBs to take prudent lending decisions. The recent spike in NPAs could also be because of the high cost of capital compared to the moderation in inflation, which has artificially kept the real rates at one of the highest levels in the world.
Clearly, India’s got a problem on the monetary side, which needs to be rectified if it is aiming to grow at seven per cent or more. Some progress has been made on this by the RBI, however, it continues to be conservative and the longer it takes for it to recognise the extent of the problem, the more prolonged the bottom of the U.
Irrespective of these short-term challenges, the outlook for economic growth for the country in the medium-term is completely positive as some of the current supply-side issues will get resolved and India will witness a growth of 5.0-5.4 per cent in the third quarter (Q3) of the current Financial Year (FY) followed by a 6.2-6.6 per cent growth in the fourth quarter (Q4) of the current FY. India will end the decade with a modest growth rate; however, the country will begin it with a seven per cent or higher growth rate in the FY 2020-21.
The question is whether this rate will be sustained throughout the decade or not. There is a reasonable belief that India will sustain a seven per cent growth this decade and it may even attain an eight per cent or high growth rate towards the end of the decade as it witnesses a steady revival of investments as a percentage of the Gross Domestic Product (GDP). This improvement will be a direct product of some of the painful reforms that were undertaken in the past, which will unleash the nation’s productive potential. The recent corporate tax cut would result in steady improvements in corporate sector balance sheets, which will result in fresh investments from 2022 onwards. At the same time, implementation of the Direct Tax Code (DTC) will simplify taxation procedures, which will further augment productivity.
There’s also talk of a GST overhaul which may happen during the next couple of years. This, when combined with land, labour and agricultural reforms, will be critical to unlocking India’s productive potential. Demographics, too, favour India as it has the world’s largest workforce which will act as a check in wage costs, thereby giving it a competitive edge over other emerging market economies for the next two decades. All of this is essential to experience the kind of transformation that several of the country’s peers experienced during the 1980s and 1990s.
Of course, fresh reforms will be required — but they are already on the agenda of the Government as the labour codes are coming into effect. Many of these reforms will be aided by the fact that there’s a mandate of 303, which enables the Government to take decisions that would be extremely difficult to push for in a divided Parliament.
Global conditions, too, seem to be conducive for India as Boris Johnson’s election in the United Kingdom (UK) will end uncertainty regarding Brexit. He has expressed his willingness to enter into a trade agreement with India and the nation should be closing trade deals with the UK, Europe and the US to further integrate itself into global trade.
Global economic growth is also likely to recover in 2020, which means that external factors will be conducive for India’s growth, provided it can address some of its domestic constraints. The year 2019 goes down in Indian economic history for many reasons. For starters, it marks the first time in the history of India where a reformist Government was brought back into power and that, too, with a huge majority. This shows how electoral preferences are maturing in India.
The outcome of the election made it possible to take three significant economic decisions. First was the merger of 10 PSBs into four. This is likely to consolidate the sector and improve its efficiency over a period. It also opens up interesting possibilities for future privatisation of some of these big four banks as there’s no need for having four big PSBs, especially at a time when the nation has already pumped in Rs 3 trillion into them without any positive outcome so far.
The second was to do with the corporate tax cut, which was promised in the previous tenure. Indeed, many consider it just a tax cut, however, it is a deep structural reform that will have long-term positive implications for financial stability and financing of investments. More importantly, it illustrates a shift in thinking of taxmen, who now recognise that tax revenues can increase at lower rates due to improvements in tax compliance.
The third decision was of privatisation of several firms, including BPCL. This is a bold move as it signals a staunch commitment to the phrase that “the Government has no business to be in business.”
This move has signalled to the world that India is finally opening greater space for private players in its economy, which has hit all the right notes. Indeed, a lot of economic progress was made in 2019 and some of it could be because of the slowdown. However, 2019 will mark a structural break for India as we enter into a decade which will certainly belong to the country’s entrepreneurs and its economic ambitions.
(The writer is a New Delhi-based policy researcher)
