Twenty years ago, a court denied the Reserve Bank of India’s request for swift justice for banks against a large loan defaulter saying, “don’t twist arms so hard that they break”. But, last week’s Rs 42,000 crore recovery from loan defaulter Essar Steel demonstrates the power of policy when the executive, legislature and courts together take on vested interests, precedence, and history. The 1,658 days that have elapsed since the IBC work began, the delay of 1,297 days since the IBC became law, and the 863 days since Essar was admitted into bankruptcy, symbolise the fixed costs for bold change in our democracy. But, it also symbolises the upsides of policy boldness and persistence; Arcelor’s takeover of Essar clears the judicial, legislative and commercial path for speedy bank recovery from the next 200 large defaulters. I believe that the current challenges faced by the Indian economy represent short-term pain for the long-term gain imposed by multiple structural changes. And, that economic growth in 2020 will be higher than in 2019 because structural reform will start paying off.
Economies are more like human bodies than machines. Doctors know that post-mortems have a certainty that prescriptions don’t, they obsess about iatrogenic risks or unintended consequences of their treatment, and recognise that acute patients need an ICU. But chronic patients need rehabilitation. Poverty is not like cancer where every malignant cell must be eliminated or it will come back. Instead, poverty is like being obese. The fight is hard and slow, victories are partial. Sometimes you regress. But, keeping up the fight by all necessary means can mitigate obesity. Eventually, diet and exercise will become a way of life, and a healthier body will yield tangible benefits.
India’s economy in 2020 is not heading into the ICU, but is heading out of a broad and deep rehab. Independent monetary policy and fiscal discipline have halved inflation. The GST has cut indirect tax categories from 100 to 5, and nearly doubled payers to 12 million. An awake RBI, the IBC and mergers of nationalised banks make bank accounting cleaner, bank balance sheets stronger and blunt crony capitalism. The Real Estate (Regulation and and Development) Act makes business difficult for non-compliant real estate developers. But a more organised and end-user driven market is reducing inventory, returning growth to stamp duty collections of states, and raising middle class affordability ratios. Demonetisation contributed to UPI digital transactions rising from one lakh to 110 crore a month. The rise in India’s ease-of-doing business ranking to 63 from 139 is raising FDI, starting to attract China’s factory refugees and is taking foreign exchange reserves to record highs. Aadhaar adoption has raised subsidy efficiency. The gross capital formation as a percentage of GDP is rising after bottoming in 2017. Food production growth is now substantially higher than population growth, making inflation decline structural (and yes, even onions; we produce 23 million tonnes and consume only 15 million). And, stock markets now largely offer valuation premiums to growth and governance.
The economic slowdown explanations must be mindful of what writer Chimamanda Adichie called “the dangers of a single story”. A thoughtful paper by Arvind Subramanian and Josh Felman lists multiple stories — land and labour market constraints, income inequality, impact of agriculture on aggregate demand, demonetisation and GST, monetary tightness and policy uncertainty. I disagree with their ICU conclusion; a sustained rehab of structural reforms, and monetary and fiscal intervention will work. The monetary policy’s 135 basis point cut in 2019 brings the RBI’s benchmark repo rate to its lowest since 2010. The fiscal response for 2019 delivered a corporate tax cut, accelerated capex, created a fund for stalled housing projects and for buying-out NBFC assets.
Arcelor’s investment — an outcome of multiple court cases, multiple IBC amendments, and multiple RBI directives — will accelerate resolution of the 1,497 pending IBC cases, particularly of the 535 that have crossed the 270-day deadline. The best expression of gratitude and duas to the remarkable public servants in the Ministry of Finance, Ministry of Corporate Affairs, the Courts and the RBI for this accomplishment will be replicating their boldness and teamwork in five areas — labour law reform, rebooting civil service, redesigning the central government, public sector governance, and investment in data collection. Labour law reform will prevent our labour from being handicapped without capital and our capital from being handicapped without labour. Civil Service reform will improve the ease-of-doing business. Central government restructuring — reducing Delhi’s 51 ministries, and over 100 departments with 250 secretary rank officials — will enable us to do more by doing less. Raising public sector governance will generate resources without damaging fiscal discipline; nationalised banks, embarrassingly, have lower risk weighted assets than two years ago, despite receiving over Rs 2 lakh crore. Raising our investment in data collection — the budget of the Central Statistical Organisation is only Rs 51 crore – will amplify trust, enable action and demonstrate confidence.
Why is the GDP of 1.3 billion Indians less than 126 million Japanese, 83 million Germans and 40 million people in California? Why is India’s GDP today 20 per cent of China’s when they were equal in 1991? Why did the world’s largest democracy — created on the infertile soil of the world’s most hierarchical society — not create the world’s largest economy? Only because of the low productivity of our government, cities, sectors, firms and people. My recent overseas investor roadshow suggests that structural reforms, the developments in China and negative interest rates make India attractive; the world wants us to succeed if we want to. The great new book Bridgital Nation by N Chandrasekaran and Roopa Purushothaman suggests that India is an antarlaapika, Sanskrit for a puzzle, in which the answer is hidden in the puzzle itself. Their observation that great entrepreneurship advice is only a traffic jam away in Bengaluru recognises that our horrible traffic represents growth. May the rest of India have Bengaluru problems in 2020. A year that will be better for the economy, tough for loan defaulters, disruptive for incumbents and exciting for insurgents.
This article first appeared in the print edition on December 23, 2019 under the title “The worst is over”. The writer is with Teamlease Services.
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