On the face of it, getting to the Economic Survey’s higher FY19 GDP forecast of 7-7.5 per cent as compared to this year’s 6.75 per cent shouldn’t be too difficult. The growth-dampening impact of both GST and demonetisation is behind us and a moderate pick-up in exports, the result of powerful global growth, should do the trick. The question, however, is whether this will be sustainable and whether this will create jobs.
The answer to both is iffy, indeed even the FY19 growth forecast requires oil prices to fall — the good news is US shale output is rising a bit — and the rupee to be weak. But an inflation-combating RBI is unlikely to lower interest rates, and the high rates attract global capital flows in both debt and equity markets — that keeps the rupee strong, encourages imports, which then lowers domestic industrial activity and makes exports that much more uncompetitive.
A big factor in the story of India’s recovery was meant to be the dollar getting stronger due to US growth picking up and firms like Apple bringing back billions of dollars of back-taxes to the US — the dollar, however, has weakened against other currencies like the pound and that has kept the rupee strong. If India’s exports don’t grow fast — India’s labour laws have kept firms small and already lowered their competitiveness — that puts a ceiling to GDP growth in FY19.
What, then, will stimulate jobs which are critical for consumption growth to get strong? Analysis of EPFO data by IIM Bangalore’s Pulak Ghosh and SBI’s Soumya Kanti Ghosh suggests that 4.5-5 million formal sector jobs were created in each of the last two years, but this sounds problematic. Since the total number of genuine EPFO accounts is in the region of 50-60 million, this would mean a sixth got created in just the last two years when the economy was limping. That said, it is equally true that the official data on jobless growth doesn’t sound kosher either.
Reviving investment is the most obvious solution, but as the Survey points out, since this is largely the consequence of firms being debt-stressed, revival is not easy. And while the Insolvency Code’s role in selling off these debt-stressed companies at a discount is very important — only when firms are not debt-stressed can they invest more — this is not a short-term palliative. In the past, and in the budget later today as well, the government will try and boost public sector capex, but this is minuscule compared to the private sector capex that has disappeared.
But while it is true debt-stressed firms will take a few years to invest, in areas where firms are still keen to invest like oil and telecom — despite the RJio havoc — government policy has been quite unfriendly. In both cases, nothing has been done to cut very high government levies though this has been known for years. In the case of oil, gas prices haven’t been fully freed despite it being obvious that the administered prices were unremunerative.
Given this, and the fact that the government is now in the last year before elections, the expectations to splurge on all manner of sops is naturally high. In the farm sector, where prices have crashed due to a bumper crop, there is a demand that the government hike minimum support prices (MSP) and procure more at this price; since Madhya Pradesh is trying to give farmers a deficiency payment if market prices fall below MSP, there is a demand the Centre also try this.
While a certain amount of extra spending can’t be ruled out, this has to be kept at a minimum. If it is not, the bond markets will get even more spooked than they are right now, interest rates will rise and, to that extent, will dampen whatever industrial activity there is right now. While genuine privatisation of PSUs is the best, even if the government is not up for this, it can get over Rs 2.7 lakh crore if it lowers its stake in 69 listed PSUs to 51 per cent. This sounds like selling the family silver to pay the grocer, but since a large part of government expenditure is capex on railways and roads, it is really asset recycling which is a good thing.
The budget, while keeping a tight rein on the fiscal deficit, must focus on reforms, some of which, as it happens, will also get the government votes. Instead of the huge fertiliser subsidy that is cornered by a small number of rich farmers, give each farmer a cash subsidy; pare down MSP-based procurement that benefits large farmers in a few states and, instead, give per acre cash payments to farmers.
Allow FDI in food retail so that farmers can benefit from direct purchases from them, do not stop farm exports every time inflation levels rise and, since the BJP is in power in 19 states, direct their chief ministers to genuinely free up cartelised mandis, ensure contract farming and allow large buyers to buy directly from the farm. Ideally a GST-council like body of state agriculture ministers should be created to fix the sector’s problems but at least start in 19 states.
Simplify GST further and, since revenues now look on track and thanks to GST and demonetisation, direct taxes are also quite buoyant, use the fiscal space created to lower both corporate and personal income tax rates — apart from stimulating investment, this will also increase spending power. While the large number of tax disputes give India a bad name — these total Rs 7.6 lakh crore or 4.7 per cent of GDP — why not create a body that has the power to settle these cases; unlike in many countries, India has no body where an across-the-table settlement can take place. That’s potentially a huge source of income and will also improve the country’s business rankings. In short, it is possible to be both pragmatic and populist at the same time.