The economy can be revived. It will take a joint effort by government and the private sector.
The prime minister has advised the senior economic team in the country to reconsider macroeconomic policy and revive growth. The finance minister has reportedly consulted,over the last few days,officials in his ministry and the Planning Commission. But that may not be enough to revive the economy,especially when it is clear that the US Federal Reserve is ready to reverse its unconventional monetary policy. It would be useful if consultations are also held with industrialists and businesses,especially those that recorded negative trends in production and sales in the last few years. Inputs from private-sector banks could also be helpful in gaining insights and designing a revival plan.
The diagnostics of the Indian economy are well known,as the Centres gross fiscal deficit has been galloping unbridled since 2008-09. The current account deficit has reached record highs over the past two years. While subsidies,market borrowings,short-term debt,bank credit to government,imports and inflation have been rising,investment,capital expenditure,bank credit to the commercial sector and industrial production have been decelerating. According to the latest IIP data,13 of the 22 sectors of industry have recorded negative growth. The negative growth in consumer durables and the capital goods industry is stark. Consequently,the growth rate of the economy has spiralled downwards from 9.6 per cent in 2006-07 to 5 per cent in 2012-13,and can be expected to be lower in 2013-14. This has resulted in flight of capital and sovereign debt downgrades by some rating agencies.
There is no reason to panic,but certainly,the diagnostics are a matter of serious concern. Though Indias growth continues to languish,it is still higher than many emerging markets. The economy is certainly revivable,given our demographics and recent experience of high growth. But the revival plan has to inspire the confidence of investors. The need is to take bold measures,like those taken by the US and the eurozone that led to an economic recovery despite the great recession.
There are remedies,some general and other specific,which the government can consider to revive the economy. In general measures,first,the government has to project the image that it is in total control of the situation,and is confident and serious about pursuing short- and long-term reform measures. Second,the general suspicious and untouchable attitude towards industrialists and businesses has to change. To revive industrial growth,the government could consider concessional loans for a stipulated period to specific industries producing consumer durables and capital goods.
Third,it is important to recognise that markets are generally wary of the uncertainty that prevails across the economy. To address this,the government should have a strong communication policy,which should be forward-looking in its approach. Finally,to inspire confidence,a high-level committee could be constituted to prepare a strategy to navigate the economy during this difficult phase.
More specifically,the government should focus on housing,construction and infrastructure,which have inter-linkages with other industries. The government has recently signed an agreement with the World Bank for financial resources for the low-income housing sector. The government should plan the use of such resources to develop satellite towns that would generate employment,income and infrastructure.
The problem of the widening current account deficit can be attributed to rising uncertainty in the economy,symbolised by large volumes of gold imports. As three-fourths of the gold in the country is purchased in rural areas,the government needs to consider providing financial instruments to address uncertainty in those areas. Illustratively,the government could consider inflation-indexed bonds to be made available through rural bank branches and post offices. The government,taking a cue from the private sector,should also consider tapping the ample resources available in the rural sector.
To address the issue of gross fiscal deficit,the government should continue with efforts to reduce petroleum subsidy and consider deferring to better economic times the implementation of the food security bill,which can be interpreted as fiscal profligacy. The need is to augment resources from the domestic economy and,given the grim external sector,the government could consider providing tax incentives to ensure higher tax compliance.
The economy is slipping away. Its revival requires a joint effort by the government and the private sector. Extensive consultations and confidence-building measures would help.
The writer is RBI Chair professor of economics,IIM Bangalore. Views are personal