Saket Misra
Finance Minister Nirmala Sitharaman’s recent presentation announcing growth supporting measures was a “taking charge” moment. It was “roll-up sleeves and act” rather than a roll back that detractors called it.
Benefitting from her business experience, she did not dither in recognizing threats to growth and offered a dynamic response. Her approach was holistic – there were sops for a few sectors and a bouquet of actions to push broad-based growth recovery. Over the next 18 months, the FM needs to undertake structural changes including some that may be opposed by entrenched interest groups.
The challenges facing the economy are known – and increasingly blown into a frenzy. The key issues are a slowdown in demand exacerbated by a global lowdown; lack of adequate liquidity and a stressed financial sector; fall in investment, savings and profitability, which are interlinked and feed off each other. It is a testing situation but hyperventilating panic will not resolve it.
The answers do not lie in misplaced populism, nationalization and unfettered PSU growth. Indeed, these factors led to India’s pledging of gold in 1991 and continue to handicap us with structural inefficiencies. We need policy responses that recognize the interlinkages in the economy and facilitate entrepreneurship.
Profits and entrepreneurship start a virtuous cycle: Profits are considered a bad word in India. Just see the high tax rates, and the number of licenses and approvals that are required to run a business. These hindrances to the pursuit of profit must go.
Our corporate profitability is abysmal. It leads to depressed investments and low credit offtake resulting in a vicious cycle that eventually hurts growth. We need lower taxes covering a larger percentage of value rather than number of taxpayers. Similarly, investments and new businesses need to be given material tax breaks and incentives. There is enough slack in government spending that can be cut to compensate for any revenue shortfall from these tax breaks.
One Facebook or Google that emerges out of India will make up for all notional tax losses, and ignite growth and employment. Regulators need to be more business friendly. The PM’s recent signaling in this regard needs to be replicated by the rest of the government. The government should also institute strong anti-monopoly measures as startups and small entrepreneurial businesses need protection from powerful incumbents.
Fiscal stimulus counts: We have been blinkered into overreliance on monetary policy. Mere interest rate reductions will not revive demand. We have to place money in the hands of companies and consumers to invest and spend whether with tweaks to MNREGA, selective, high employment generating public spending, incentives to farmers to improve crop diversification and productivity and so on. Reduce the focus on fiscal deficit targets till growth is on track. Beautiful graphs to impress the IMF do not help an economy recover.
Limit “real” government borrowing: While conventional government borrowings have been disciplined, public sector enterprises continue to borrow heavily. The crowding out will only intensify even more as public sector lenders seek to protect themselves from vigilance investigations by increasing their lending to PSUs. There is an immediate need to measure and limit actual, aggregate government borrowing coupled with monetization of productive assets to generate resources for new investments.
Disinvestment: Two streams are needed. One, the reduction of government stakes in private companies. Second, sale of assets in the PSU sector. This cannot be done by one PSUs buying another. That is a fruitless exercise. For instance, there is little commercial or strategic rationale in handicapping LIC with IDBI Bank. PSUs must quit some businesses. For example, we do not need multiple PSUs offering telecom infrastructure with poor returns. Find innovative ways to exit non-core operations.
Revive and restructure the financial system: Timely credit availability is a major overhang on growth. The FM has taken the brave decision to merge and consolidate PSBs. This should create stronger banks to support the dream of Indian becoming a $5 trillion economy by 2024. In the interregnum, there will be some slowing of operations in these banks. NBFCs, battered post the IL&FS crisis must step in. RBI should directly provide liquidity to NBFCs on the lines of the US Federal Reserve’s Troubled Asset Relief Programme (TARP). This can be at commercial rates, against security of viable assets and with a finite sunset. Once basic liquidity is assured, private capital will follow.
Alternative to China: Presently, Vietnam, Thailand and some other economies are benefiting from the shift in manufacturing away from China due to its trade tensions with the US. Instead of passively waiting, we need to grab manufacturing proactively the old-fashioned way – make a list of the top 500 western manufacturers in China and provide specific incentives to each to set up or expand manufacturing in India.
Prepare for a changed economy: Jobs over the next 50 years depend on a new economy driven by technology and data rather than conventional manufacturing. An urgent and important first step is a robust data localization regime. What banning Facebook and Google did in China can be replicated with exponentially greater returns if we localize data and provide the ecosystem for developing AI businesses.
Saket Misra is an investment banker. Views are personal.
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