Pronouncements need to balance short-term impetus and structural course correction
Numbers speak for themselves.
India’s economic policy uncertainty index came in at 83.6 in May, much higher than 64.7 in January, but lower than the 88.9 in May 2014 after the previous general elections.
A lower reading indicates reducing uncertainty.
The index, a compilation of newspaper references of specific terms, and created by economists Scott Baker, Nicholas Bloom and Steven Davis, is a reasonably good barometer of policy-related economic sentiment.
Other sentiment indicators also narrate an interesting story. The April round of the Reserve Bank of India’s consumer confidence survey showed considerably improved future expectations, but the May round shows a dip.
Still, expectations remain better than what consumers felt six months ago. Business sentiment, however, continues to be weak.
Together, these suggest that there will be policy continuity and room for tougher reforms. While optimism on consumer demand augurs well, capacity overhang in some sectors is keeping a tight lid on animal spirits.
The National Democratic Alliance (NDA) pursued a repair-and-reforms approach in its first innings -- repair in the banking and power sectors, among others, and reforms in taxation through the Goods and Services Tax, debt resolution through the Insolvency and Bankruptcy Code, allowing more foreign direct investment, and providing energy access to poor households.
While this will enable sturdier medium-term growth, a stronger and immediate short-term push to growth is an imperative.
In the second innings, the incumbent government will need to look at ways to lift the economy out of a downturn, boost consumption demand sufficiently to raise capacity utilisation in key sectors and ease constraints to capital investment. By continuing infrastructure investments, the government would not only create employment, but crowd in private investments.
For the past several years, sluggish capital investments have led to an unsustainable growth trajectory. Fixed capital investment as a percentage of GDP (gross domestic product) picked up only in 2016-17.
But capital investments have been chugging along on government spending without much private sector support. The capex of central and state governments and public sector enterprises has grown at an average 15 percent per year in the past three years.
Private investments have been languishing with few spurts in a few sectors. The latest blow comes from the slowdown in exports, which could make manufacturers scale down capacity addition plans.
In some sectors, unutilised capacities are huge. With the deleveraging process slow, and rising trend of domestic consolidation in energy, telecom, cement and steel, private companies have low investment appetite.
To accelerate capex in such a milieu, the government will have to give private consumption a solid push in the Union Budget for this fiscal.
While a benign inflation environment gives the Reserve Bank of India scope to cut the repo rate further and support consumption, interest rate transmission needs to improve materially.
On the fiscal side, the government needs to realign and prioritise expenditure. Private consumption could see tailwind from minimum income support scheme for farmers. While low inflation and benign interest rates are enablers, sustainable consumption revival would emanate from a wider income push.
This can come from higher spending on labour-intensive sectors such as construction (roads, highways and housing), which should be a clear focus of the Budget.
Also, building transport infrastructure has two benefits – job creation, which drives sustainable incomes and demand, and connectivity, which opens up employment opportunities.
A study by Asher S and Novosad P found that new rural roads cause a 9 percent fall in the share of agricultural workers and an equivalent increase in wage labour since there is greater access to jobs outside the village while the rise in jobs in the village is small.
This is especially true for small farmers, suggesting labour reallocation could lead to better incomes. India has ~125 million such small farmers. Other studies find net farm output increases 5 percent or more as roads are built. Health and education outcomes also improve owing to better access.
The other imperative is easing financial sector stress to stimulate credit growth. As demand picks up, consumers will need credit and corporates will go for borrowings to invest. Currently, the financial sector’s ability to fund these growth drivers is impaired, but this does not require a Budget push.
(Dipti Deshpande is Senior Economist, CRISIL. Views expressed are personal.)
 2019, Asher S and Novosad P, ‘Rural Roads and Local Economic Development’ 2012, Bell C and Dillen S, ‘How Does India’s Rural Roads Programme Affect the Grassroots? Findings from a Survey in Orissa’Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.