How to fix the Indian economy which is in a free fall
Over the past few months, the Indian economy's growth engines — from real estate to agriculture to exports and internal consumption — have coughed and sputtered to a halt. The economy is now in free fall. Figures recently released by the government have confirmed our worst fears. India's GDP growth plunged to a 26-quarter low of 4.5 per cent in the July-September quarter of 2019-20 as manufacturing contracted, investments weakened and consumption demand fell. GDP growth stood at 8.1 per cent in the same period a year ago. In the first quarter of this fiscal, it was just 5 per cent, already the slowest in six years. The steep decline is now approaching a danger mark — 3.5 per cent — the metaphorical 'Hindu rate of growth', a coinage of the economist Raj Krishna for India's sluggish growth rate from the 1950s to the mid-'70s.
The economy has dominated our coverage like no other topic this year — other than politics, of course. We have devoted five cover stories and scores of articles since the second Narendra Modi government came to power over six months ago towards understanding the continuous slide in the growth of the economy. This growth recession does not bode well for the government's much-trumpeted target of a $5 trillion economy by 2024. India will need to grow at over 8 per cent, roughly twice the existing growth rate, to achieve this target. As has been pointed out before, the government does not have the same enthusiasm for economic reform that it displays in pursuing its social and political agenda. Although finance minister Nirmala Sitharaman announced that she has taken 32 steps in various sectors to reverse the trend, none of them seems to have worked. These measures were essentially a supply-side response to revive growth and done in a somewhat ad hoc way. If they are to yield any result, it will probably be in the medium and long term. It hasn't changed the sentiment in the business community at large. The government seems to be at a loss as to how the economy can be kick-started.
Our latest cover story asks the big question — 'How to fix the economy'. And who better to answer this than Raghuram Rajan, Professor of Finance at the University of Chicago Booth School of Business and, more memorably, RBI governor between 2013 and 2016.
Rajan has been a vocal and outspoken critic of the government and its policies. As RBI governor in 2014, he had questioned the government's 'Make in India' policy on the grounds that it assumed an export-led growth path rather than a 'Make for India' one that produced for the internal market. Rajan was on to something then — the fact that our growth miracle was largely consumption-led and that budgetary incentives were needed to nurture household savings that could ensure India's investments were largely financed out of domestic savings. Five years later, his assessment is that the steps taken by the government have been inadequate to address the malaise and he outlines a coherent reform agenda. He feels the main reason for this economic mess is "the centralised nature of the current government. Not just decision-making but also ideas and plans emanate from a small set of personalities around the prime minister and in the PMO. That works well for the party's political and social agenda, which is well laid out, and where all these individuals have domain expertise. It works less well for economic reforms, where there is less of a coherent articulated agenda at the top, and less domain knowledge of how the economy works at the national rather than state level".
He suggests over a dozen remedies — from cleaning up the NBFC sector to reviving stalled infrastructure projects, especially in the power sector, ensuring a level playing field within the telecom sector and creating an environment for investment and growth by focusing on liberalising capital, land and labour markets. He gives the NDA-II government credit for introducing the IBC and the GST but points out that efforts to improve governance of public sector banks have virtually been abandoned.
Agriculture is another sector that Rajan thinks needs immediate intervention. He calls for reforms to ensure easier access to inputs like seeds, technology, power, finance and insurance. To boost investment, he suggests making land acquisition easier by accelerating mapping of land and establishing ownership titles and to encourage firms of greater scale and allow more flexibility in labour contracts. Keeping barriers to competition high, Rajan says, is the surest way to ensure India remains uncompetitive. His suggestion is to steadily increase domestic competition by reducing tariffs and joining free trade agreements judiciously. He thinks India can attract more investment by becoming more predictable on tax and regulatory changes. Instead of a permanent tax cut for the urban middle class, he recommends supporting the rural poor through programmes like NREGA. Finally, he advises the government to follow its pre-2014 election pledge of 'minimum government, maximum governance'. The slogan, he says, doesn't mean just making the government more efficient but of actually withdrawing from directly doing business and expanding its capabilities in regulating the quality of education, food and health.
I have always maintained that in Prime Minister Modi and home minister Amit Shah we have a formidable duo who understand politics like no one else does and who have made the BJP the nationwide force that it is today. They also have the ability to take tremendous political risk as decisions like diluting Article 370 have proved. The Indian economy is crying out for reforms. According to Rajan, the last steady reformer was the NDA government under Prime Minister Atal Behari Vajpayee. UPA-I, he says, did not have the internal consensus to pass growth-enhancing reforms and the one that followed was paralysed by scams. Redistribution of wealth has been the NDA's hallmark and many programmes have benefited the poor, but this cannot be sustained without revenue growth. Prime Minister Modi, in particular, is someone who understands the importance of creating a legacy. Perhaps it is time for him to direct some of his energies towards arresting the slide in the declining economy with a series of well thought out reforms. Otherwise, history will not judge him kindly.
(India Today Editor-in-Chief's note for the cover story, How to fix the economy, for December 16, 2019)
Also read: How to get the Indian economy back on track