India is caught at the intersection of a promise of a $5 trillion economy and the reality of a slowdown, between hope and despair.
Data released on Friday by the government is a brutal testimony on the state of the economy. GDP growth slid from 8 per cent a year ago to 5 per cent, the lowest in six years and lower than the most pessimistic forecast of economists. Clearly there is no room for denial.
There is a debate on whether the slowdown is cyclical or structural. When the economy does not respond to interest rate cuts and government spending, that which seems cyclical is structural. The slowdown is marked in labour-intensive segments. Manufacturing slid from 12.1 per cent to 0.6 per cent, agriculture from 5.1 per cent to 2.0 per cent, construction from 9.6 per cent to 5.7 per cent. Gross value addition, the go-to benchmark, slid from 7.7 per cent to 4.9 per cent.
Growth largely rests on private consumption. The spinmeisters have quibbled and quarrelled about the slowdown in consumption—even parking the blame for the slowdown in auto sales on the manufacturers. Fact check: Private final consumption expenditure grew at just 3.1 per cent!
The slowdown in consumption owes its genesis to a series of factors—from demonetisation to the GST regime’s systemic delinquency, from agri distress to balance sheet stress. The NBFC default crisis aggravated collapse of capillary lines of credit. The precipitous fall in consumption has skewered open the physiological and anatomical flaws in the economy.
Change, my book Accidental India chronicled and proved, comes only in the wake of crises. The government has stepped out of denial mode and unveiled measures—undoing and redoing policies to lift sentiments. The lifting of FDI caps, the reversal of tax on FPIs and linking of lending with repo rates are par for the course. The merger of banks is a good diet and exercise plan for when the patient steps out of the ICU.
The key to getting the economy out of the ICU is to go radical. The focus is on reviving consumption. Ideas being floated include cutting GST rates, lower interest rates, a one-time LTCG tax break and even cash transfers. Naysayers worry about the moral hazard, and argue that the impact of cash transfers is not linear. There is also the fiscal cost. The counterargument being what may be lost say on the LTCG break may be recovered at the GST counter.
It is evident that Adam Smith’s proverbial ‘invisible hands’ need a helping hand. But success depends on the choice and efficacy of strategy. Consumption is defined by the desire and ability to spend. The question is, does the consumer feel confident about tomorrow to spend today? This signal of this confidence will need to come from the government. For this it will need to put its own balance sheet in order— beyond the windfall from RBI, the bulk of which is already apportioned.
To pay for growth the government must raise resources. This is doable if it makes up its mind to get out of business. Its most valuable asset today is the Life Insurance Corporation. Arguably one of the largest insurers in the world, the LIC, if listed, should raise a kitty worth the political battle—top insurance companies in the world boast of market values of $50 billion and more. To make it palatable the public issue could be restricted to ensure a diversified shareholding --to domestic investors, funds and FPIs and for starters the government could hold 51 per cent --and subsequently divest up to 26 per cent to block statutory resolutions and takeovers.
Second, the Niti Aayog has prepared a list of 23 PSEs for disinvestment. They could be parked in a sovereign trust and then offloaded to domestic and international investors. There is no real right time for disinvestment—only the right reason. Yes, mergers are good, but what about erosion of value—the market value of HDFC Bank is more than all PSBs put together.
Third, it must pool all the idle and surplus land in its possession into a national land bank. This land can be made available for plug-and-play projects of affordable housing and for MSMEs. The land bank can be an SPV under the NIIF and it could probably issue REITs or ETFs for raising resources.
The money thus raised can fund tax breaks for citizens, a rollover restructuring of debt for MSMEs across sectors and front-loading of spend on solving the day-to-day problems of people, from provision of water to urbanisation—all of which will create jobs.
For too long the economy has been caught in a structural rut. Successive governments adopted the ‘throw money, problem will go away’ formula—between 2010 and 2019, the spend of the Centre has doubled and that of the states has trebled from Rs 10 lakh crore to Rs 24 lakh crore, and from Rs 10 lakh crore to Rs 35 lakh crore.
The UPA deployed a combination of higher borrowings and bank funds to keep the balance sheets alive. This regime used the fall in crude prices and the taxes thereon. Used PSEs to garner revenues—ONGC bought HPCL, companies issued dividends and wrote buyback cheques. FCI and NHAI, to which the government owed money, were asked to borrow instead. Friday’s data shows that flyover economics has run its course.
Shankkar Aiyar
Author of Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
shankkar.aiyar@gmail.com