The bronze bull statue at the Bombay Stock Exchange | Dhiraj Singh/Bloomberg
The bronze bull statue at the Bombay Stock Exchange | Dhiraj Singh/Bloomberg
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Okay, the Indian economy is in a slowdown and it is absolutely important for us to quickly get back onto the path of high growth. The $5 trillion-dollar question is “how”? Unfortunately, the public discourse over finding answers to this question has become mired in macroeconomic jargon, bureaucratic grammar and stock market clichés that are confusing even when they make sense.

Informed, educated citizens — like their political leaders — can be forgiven for being confounded when told that we have a twin balance sheet problem, banks stuck with NPAs and that transmission channels have to be strengthened and aggregate demand has to pick up. Sure, there is a need — and an important one — for technical discussion among macroeconomists, financial analysts, business journalists and policymakers, but it cannot be the only show in town.

The problem

What the disproportionate focus on macroeconomics misses is the fact that to increase economic growth, you need to change the behaviour of individuals and companies. It is important to realise that the economic slowdown is not a malfunction in an invisible, impersonal machine called the economy. Rather, it is the outcome of a change in our individual behaviour. People are not spending because they don’t have jobs, they have less money to spend or they are anxious about the future. Companies are cutting production because they sense declining sales, have inadequate working capital or are unable to secure loans. Exports are not growing fast enough. Investors are moving money into safe but unproductive assets like gold and real estate or moving it abroad. All the policy levers and technical twiddly-bits like interest rates, tax cuts, money supply and so on are ultimately instruments to effect behavioural changes.

Economic output is the sum of consumer expenditure, investment, government expenditure and net exports. The best way to increase growth is to increase all four of the above. That’s it. More than discussing interest rates and Sensex levels, we must now ask how do we get consumers to spend and invest more, firms to export more, and the government to walk the tightrope between spending enough while not borrowing, taxing or printing money too much.

So, what should we do?


Also read: Rising consumption, enough loan demands — economy is looking up, says Nirmala Sitharaman


The solution

In the immediate term, people most likely to spend money should be enabled to do so. Reducing personal income tax rates for salaried people and folding the highest GST rate to 18 per cent will galvanise spending and investment. It’s a good opportunity to implement the Direct Tax Code, that will lower income tax rates and expand the number of taxpayers. In rural areas, price regulation of agricultural commodities is a dampener — farmers are unable to take advantage of higher prices because governments impose price controls and export quotas.

A credible commitment to enabling massive employment growth — which requires deregulation and commitment to market competition — is likely to embolden consumers to spend more and make financial investments. Government policy must work towards persuading Indians — through both words and actions — that they need not be anxious about the future.

The current consensus, following economist and former Chief Economic Adviser, Arvind Subramanian’s arguments, is that firms are unable to borrow money from banks for working capital and business expansion, because of the legacy of bad debts. So, government policy is concentrated on fixing the “twin balance sheet problem”. While cleaning up bad debts, helping banks to recover and coaxing them to lend more is a good thing and perhaps necessary, we must be alive to the possibility that, as CMIE’s Mahesh Vyas argued, “the problem regarding the current investments slowdown was never in the balance sheet of the corporate sector or the banks. It was never a Twin Balance Sheet problem.” The upshot of Vyas’s argument is that if firms sense that domestic demand is back on the upswing, they have the ability to invest. Also, the undue focus on bank lending ignores other places where money can be “stuck” — big corporations and governments not paying suppliers on time, friction in the GST refund cycle and public procurement policies loaded against start-ups and small businesses.

Similarly, exporters can become more competitive in the short-term if domestic friction is reduced. Finance Minister Nirmala Sitharaman’s recent announcement of a new scheme to reimburse import taxes and increase credits is a step in the right direction, especially if it is unambiguous and simpler. This is only a salve — the real boost to exports can only come if India forcefully advocates free trade.


Also read: Modi govt has sent up ‘monetary helicopter’ to inject cash and revive India’s growth


The complication

We have ended up with an entirely avoidable trade dispute with the United States and are beholden to strong ideological forces that are against entering international trading arrangements. Instead of exploiting the immense opportunities created by the US-China trade war, we are toying with the idea of repeating the failed trade policies of the Indira Gandhi era.

Let’s be clear: this back-to-the-1970s approach to international trade will take us back to the 1970s situation for exports. Finally, government expenditure is part of the solution in reversing the slowdown. Yes, lowering taxes and increasing expenditure at the same time will widen the fiscal deficit and take it well beyond the Fiscal Responsibility and Budget Management Act (FRBM) limits. Now big fiscal deficits are bad because government borrowing dries up the pool leaving little for private investors, and the debt repayment burden leaves less money for the things that a government ought to do. If the government orders the RBI to print money to finance its deficit, then we get higher inflation.

The addition

Yet in a slowdown, government expenditure can galvanise the economy if it is done right. At the same time, the government can afford to spend less on itself: all departments could implement a 5-10 per cent reduction in operational expenditure. Putting more money in the hands of citizens and public investment in infrastructure — highways, ports, capitals, defence equipment, education — will boost business activity and create conditions for a virtuous cycle of growth. Remember the 100 new smart cities? Getting even a handful of them started now can invigorate the construction sector and create millions of jobs in the medium-term. Why not create new “global economic zones” where foreign companies fleeing from China and elsewhere can relocate?


Also read: The panch tattva that Modi govt must adopt to revive Indian economy


The warnings

There are a couple of things that the Narendra Modi government must not do. The most important is not changing the rules in the middle of the game, or appearing to change rules to benefit or penalise individual companies. If investors — whether domestic or foreign — believe that the business environment in India is both unfair and uncertain, they will vote with their feet.

It is heartening to see that the slowdown has re-awakened us to need for structural reforms: in recent weeks, Vice-President Venkaiah Naidu, RBI governor Shaktikanta Das, CEO of Niti Aayog Amitabh Kant and high-profile Mumbai investor Rakesh Jhunjhunwala are among those who’ve advocated them. We’ve been waiting for them for 20 years. It’s a good time to roll them out.

The author is the director of the Takshashila Institution, an independent centre for research and education in public policy. Views are personal.

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10 Comments Share Your Views

10 COMMENTS

  1. BJP has no clue with regard to bringing the economy back on rails. An year back there was publicity blitzkrieg about Defence corridor when Madam Nirmala came to Chennai and said Hundreds of Industries have signed up to collaborate with Defece depart.ent. Can soeo e tell e who has started manufacturing? NOT ONE.
    IT IS NOT VIABME. AND BJP IS BEREFT OF IDEAS. MUCHESS THEY ARE CLUELESS.

  2. Mr Kumar is right when he says that chaiwala wants maximum laws and control. As a matter of fact Indians hate wealthy people. Under the circumstances we have no option except to establish Public Undertakings. We must copy China. The golden rule is ‘Establish a pubic undertaking, sell it the day it becomes red’.

  3. chaiwala wants maximum laws and control so that he can nail as many people in illegal activities web by making legal activities illegal.
    take for example the chidamabaram issue. FIPB like institutions doesnt even exist in most foreign countries which welcome investment.
    But through such ‘rules’ legal is made illegal.

  4. What people fail to understand is that much of the reforms needed are at the states. Look at the stupidity of Andhra Pradesh government, cancelling all contracts related to Amravati. What investor in his right mind will go to Andhra right now ? The AAP government in delhi and the regulator for the discoms destroyed the entire business model for power distribution. Then you have the ludicrous royalty expectations from mining contracts in odisha.
    Rajasthan tried doing some reforms in land and labor but was kicked out of power and now you have mr.socialism gehlot ji back as cm. Kerala the state with the most educated population should hav been the start up hub of this country but currently has the highest unemployment. No one will move their factories here when industry is expected cross subsidize railways, highways and power for household consumers. We have inherited the bug of socialism and it will continue to kill any hopes for fast growth. The way the GST is constructed shows how bankrupt is our understanding of economics. All these articles are too optimistic. Yes we will become a 5 trillion dollar economy but it will take about 8-10 years.

    • Very true. This emphasises the need for genuine cooperative federalism. Centre and states as one seamless entity as far as investors are concerned. With the BJP controlling the Centre and so many important states, the process should become even simpler.

    • people like you want all power and no responsiblity.
      What’s wrong with odisha’s royalty model? Why should miners get away with paying paltry amounts as mining royalties? only so that you can milk more? The royalty proceeds will go towards tribal welfare, education, public spending which is more important in the longer run. How else do they raise money?
      Nothing wrong with labour laws. Labour laws implement dignity of labour.you want exploitative advantages. If there is a problem with how labour laws implemented ,address it. But you want a hire-fire economy.

  5. Shubh kaam mein deri kya … 2. China is celebrating its seventieth birthday today. At the cost of over simplification, the widely diverging trajectories of the two economies since 1978 can be attributed to economic reforms. 3. See the latest figures for core sector growth. What else do we require from the pathology lab to convince us that the patient needs to be wheeled into the OT for emergency surgery.

    • Deri isliye kyon ki if Indians get prosperous government loses it’s power. No government wishes to lose it’s powers, that true liberalisation entails. The kind of reforms that PM Rao carried out, where government gave up many of it’s powers to control economic activity. India governments wish to occupy commanding heights, the Mai baap Sarkar, doling out favours to it’s impoverished subjects. Cha-Cha Nehru started it, his daughter further improved on it and the present government intends to perfect it.

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