Imagine the impact on economic growth if we just reform, avoid taking decisions that dampen growth in any sector and combine this with a check on overzealous departments
The fact that our economic growth has slowed down is not a surprise to anyone. This trend started from September last year and there are reasons to believe that we may be witnessing signs of an early recovery. A likely casualty of the fiscal downturn is that even the naysayers have started to believe in India’s official statistics, just like the recently-concluded Assembly elections have punctured the narrative regarding faulty Electronic Voting Machines (EVMs).
Some may continue to question the official statistics and the fact remains that no statistical data is completely free from errors. However, the problem is not with the methodology and therefore, if there are issues, they must be with the Ministry of Company Affairs’ website MCA-21’s database. But, with the first quarter (Q1) of the financial year (FY) 2019-20 growth at five per cent, one can argue that the official statistics indeed are reflective of what’s going on in the economy. That is, we’ve slowed down from eight per cent to five per cent in a span of four quarters.
How did this happen? The answer is our banking sector which continues to reel under substantial pressure. The recent deceleration of the economy coincides with the IL&FS crisis which spread to other Non-Banking Financial Companies (NBFCs).
It is important to recognise that the financial system is fragile and interlinked, thereby resulting in spreading and enhancement of risks. This makes it more important to handle such situations with utmost care and dissolve them as quickly as possible. The fact that we saw a NBFC crisis at a time when we were already dealing with the Non-Performing Asset (NPA) crisis only choked our financial sector, thereby resulting in a full three per cent decline in growth over four quarters.
Luckily, we’ve witnessed impressive filings by banks for the second quarter profits which suggest that problems in the banking space seem to be largely over. It is, therefore, important that we address any fresh vulnerabilities that may emerge. There are two important points worth noting here. First, credit offtake is sluggish as most bankers are indeed wary of lending. Therefore, while banks may have adequate liquidity, it is not translating to credit at the retail level.
Second and more importantly, the process of NPA recoveries has invariably stigmatised bank-financed debt and, therefore, small and medium businesses seem to be a bit wary of borrowing from banks.
While there are many ways to address the first part of the problem, it is difficult to address the second aspect with any policy intervention. These two factors combined ensure that credit-offtake is sluggish, which inadvertently has an adverse impact on our economic growth.
Even for existing loans, we see businesses becoming eager to repay the debt while being cautious about financing fresh investments through debt. This trend needs to be reversed and there’s an urgent need to de-stigmatise business failures. The first step towards achieving this would be separate cases of bank frauds with genuine business failures. This is important and imperative at this juncture as we aspire to create an innovation-led, entrepreneurship-driven $5 trillion economy.
Further, it is important to recognise the problems in our policies, especially the monetary one. We had a prolonged period of extremely high real interest rates which have only amplified the problems in the banking space. This recognition is important as it may ensure we avoid such a mistake in the near or even distant future. There may still be some room for further interest rate cuts and we will get to know more on this only after the October inflation figures become known.
The Government will indeed have a fiscal strain due to the ongoing slowdown as tax revenues will fall short of targets. Many estimates suggest that we’re looking at a Rs 2 trillion shortfall in the current fiscal. While I am not a fiscal hawk and there are reasons to be less worried about the deficit, the Government, too, has acknowledged that fiscal deficit is not a cause of concern at the moment.
Given the track record of the National Democratic Alliance (NDA) to stick to its own stated fiscal deficit targets, one can safely assume only a minor deviation from the same, despite the revenue shortfall. The gap will very likely be filled up with the aid of non-tax revenues through either disinvestment or privatisation.
At the same time, it is important to recognise the second and third-order effects of decisions made by different departments on the Indian economy. For instance, let’s look at the telecom sector that has been struggling since the 2G scam. The sector grew over the last couple of years primarily due to increased debt. However, there was some confusion with respect to what constituted as revenue under the spectrum revenue-sharing agreement with the Government. The amount due, combined with penalties and interest on it, is to the tune of Rs 92,000 crore, which the Department of Telecommunications (DoT) is seeking from telecom companies. This, at a time when the sector has witnessed two successive exogenous shocks, is only likely to compound their problems. Given the state of the telecom sector, the Government should consider foregoing the existing demand and move to the new agreed revenue formula as prescribed by the Supreme Court (SC). Doing so will give the sector a fresh impetus and undo the damage caused by the 2G fiasco.
It is interesting to note that just at the time when the Government is keen on privatisation, it has announced a revival package for Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). If history has shown us anything, it is that the Government can’t run anything. Therefore, the package for BSNL and MTNL is likely to be money which could have been productively used elsewhere. The only positive about the package is the voluntary retirement scheme and likely merger which may pave the way for future consolidation, down-scaling and eventual partial privatisation of its non-strategic operations.
While many would argue for reforms in factor markets such as land or labour, it is equally important to avoid overzealous departments from taking decisions that will dampen the growth of sectors.
At the same time, recognising the limitations of the Government and its ownership will enable a more ambitious privatisation programme which will unshackle our economy leading to a productivity surge-led growth.
There are a lot of low-hanging fruits in India when it comes to policy levers and reforms. Therefore, just focusing on them is going to put us back on a seven per cent or plus growth path. The mantra for the same is simple, reform and avoid taking decisions that would dampen growth in any sector.
The first United Progressive Alliance Government didn’t undertake any reforms but just avoided decisions that dampened growth, thereby reaping rich dividends from the reforms undertaken by the Atal Bihari Vajpayee Government. In contrast, both the terms of the Narendra Modi Government have witnessed a continuous agenda of reforms. Imagine the impact on India’s economic growth if this was combined with a check on overzealous departments.
(The writer is a New Delhi-based policy researcher)