2020 was one of the worst years in world history. It stands out as the worst in terms of people killed by the pandemic and economic contraction in the last 75 years. The global economy shrank by 4.3% in 2020, over two-and-a-half times more than the global financial crisis of 2009. The recovery of 4.7% expected in 2021 would barely offset the losses of 2020.
However, some people had it good too. Investors in the stock market and those involved with it made money by just sitting through the crisis. In India, Adani-Ambani grew richer. In 2021, vaccination has begun, India has probably attained herd-immunity and I do not expect any second pandemic wave in South Asia; the economy is rebounding, the worst is apparently behind us. IMF assessed the fall in India’s GDP to be minus 8 percent in the current fiscal year and expect the growth to be 11.5% in the fiscal year 2021-22. The combined growth of the two years comes to about 3%. The Indian budget will be out soon. In this blog I have attempted to analyze the present state of India’s economy with a view to make humble suggestions to our FM to help the economy.
World Economy: Major Expected Trends
- Rising Economy-Sluggish Stock Market. The subdued economic activity attracted idle money to the stock markets which rose. As economic activity rebounds the stock market will stop rising at such a fast pace. The trend is expected in India too.
- Rising Inflation. Inflation is expected to rise because of reduced movement of population, causing an increase in costs of production. The high quantity of money printed in 2020 will also be another major cause. Inflation has been on the rise in India too.
- Rising Interest Rates. The rise in inflation will force the central banks to raise interest rates. RBI may be forced to raise interest rates at some point during the year.
Indian Economy: Challenges
- Unemployment. Unemployment is the biggest challenge. There is a great need to not only create jobs but also raise income levels.
- Poor Consumer Demand. The rise in unemployment, steady fall in the income of the farmers with steady rise in the cost of inputs without a corresponding rise in the prices of outputs and lowered earnings of those at the bottom of the pyramid has adversely affected demand. This has to be raised for the economy to grow.
- Health. Health of the population needs to be improved to enhance productivity.
- Education. Education suffered during the pandemic, particularly for the poorest children. This has to be brought back on track and improved.
- Poorly Managed Finance Sector. RBI’s recent Financial Stability Report shows that NPAs could increase to 13.5% by September 2021 compared to 7.5% a year earlier – and for public sector banks they could increase to 16.2% compared to 9.7% a year earlier. This is a great challenge and has to be resolved at the earliest. So far the government has not shown the determination to resolve the issue.
- Support to MSMEs. MSMEs contribute approximately 30% of India’s GDP, 45% of manufacturing and employ 12 crore people. They were badly hit by the lockdown and need support. This has to be done with deliberation because India can ill afford to throw good money after bad and the units which lack competitive advantage should not be supported.
- Support to Construction Sector. The construction sector is a big employer. It needs support.
- Private Investment. Increasing private investment is a big challenge because it is linked to demand. The private sector will only start investing once it nears full capacity utilisation.
- Increase Capital Expenditure. To increase growth, increase employment and attract private investment government has to increase public capital expenditure. The government has very limited funds.
- High Fiscal Deficit and Low Revenue. India has a very high fiscal deficit. The fiscal deficit for 2020-21 is expected to be about 7 per cent.The capacity of the government to spend more will depend on the level of deficit. If the debt increases beyond comfort levels, then next year too, the government’s capacity to spend further will remain impaired. Government revenue has been low and is likely to remain low.
- Increase Defence Expenditure. China has apparently decided to nibble parts of India and is not inclined to resolve issues through dialogue. Thus India perforce has to increase defence expenditure to increase our guard at the LAC.
- Improve Governance and Credibility. Poor past economic policies and poor governance had lowered India’s GDP, raised unemployment to the highest in 45 years even prior to the pandemic. India has deteriorated in parameters like malnutrition, stunting and wasting in the last 5 years. Removal of Article 370 from Kashmir brought the economic activity in the UT to a standstill, the CAA protests, the ongoing farmers’ protest, the government engineered riots in Delhi have increased the hardships of the people. In India’s figures related to economics have lost credibility (the 20 lac crore economic stimulus package announced by the PM was far lesser), our judiciary and press have lost credibility. Divisive politics of BJP is not conducive for social harmony and economic growth.
Indian Economy: Opportunities
- Demographic Dividend. The story of India’s demographic dividend has not ended. India needs to benefit from this fact.
- Low Cost of Capital. The cost of capital in the world remains low. India can benefit from this to improve infrastructure, increase GDP and generate employment.
- Cheap Labour. India has large amount of cheap labour. India has potential to create more establishments like Suzuki’s car manufacturing units and Samsung’s mobile manufacturing unit.
- Low Corporate Tax. Corporate tax has been reduced already and it is suitable to attract FDI.
Suggestions for FM/PM
- Demographic Dividend. One of India’s main advantages is its demographic dividend, the rise in the share of population in the working age group of 15-65. We are not utilizing it well. In fact, the open unemployment rate has tripled to 6%. In most miracle economies, the labour force participation rate (LFPR) rose to 60-65%, boosting gross domestic product. In India, it has slipped to 43% in 2019-20 from 50% in 2016-17, and Covid has driven it down further to 39%. Useless colleges are churning out unemployable graduates. Female urban labour participation is barely 14%, among the lowest in the world, because urban women fear rape, molestation and robbery. Without huge social and legal changes, India is going to miss out on its demographic dividend. The government needs to make elaborate plans to benefit the country from this dividend. The old leaders of Indian society owe to the present youths.
- Increase Capex. Government expenditure on infrastructure is vital to create growth and jobs. The government should not hesitate to borrow funds for the same as the growth generated will more than offset the pressure of debt by generating revenue. The government should follow models like Konkan Railway, Delhi Metro and Delhi Airport. These are PPP projects where the private element ensured delivery and also was an effective guard against corruption.
- Increase MNREGA Funds. MNREGA should be kept as an open ended scheme and allotted budget should be kept high-something like 2.5 lac crore to ensure rise in rural demand and creation of rural infrastructure.
- Continue Garib Kalyan Yojna. The government needs to continue the Garib Kalyan Yojna for another 6 months.
- Resolve NPAs. The Insolvency and Bankruptcy Code needs to be implemented with greater resolve.
- Repeal Electoral Bonds Scheme. The electoral bonds scheme is opaque and is a big cause of making elections very expensive in India and making BJP one of the richest parties in the world. Since the Supreme Court is too scared to nullify it, the government should do so.
- PM CARES Fund. The government should stop further subscription to the PM CARES fund and bring it under the ambit of RTI.
- Focus on Education & Health. For India to benefit from the demographic dividend the government needs to increase the education and health budget. Example of the Delhi government is worth emulating.
- Disinvestment. Disinvestment is vital to check the fiscal deficit and mobilize the much needed funds for public expenditure. Creation of a disinvestment ministry, like in the Vajpayee government is a good idea. The targets for the ongoing year have not been met, thus increasing the debt burden.
- Simplify GST. The FM needs to lower the higher slabs of GST and keep not more than 2-3 slabs. Poor implementation of a good idea has caused much hardships and economic woes.
- Don’t Touch Taxes. The FM would do well to not raise or lower the taxes. The country would be better off without COVID cess as some are suggesting. India should not pursue the cases against Vodafone and Cairn.
- Reduce Excise on Petrol/Diesel. The high excise duty on petrol and diesel is affecting the budgets of the middle classes as well as the poor. Diesel is needed to run tractors and pump water and run generators and trucks. A combination of these have raised production and transportation costs. This should be reduced to help the people. It may increase the government revenue in the long run.
- Repeal Farm Laws. The farm laws are bad and unacceptable to the majority of the farmers. The government should repeal them and come up with agriculture reforms after deliberation with all the stake holders.
- Stop Hindu-Muslim Agenda. Learn from Rahane. The government could learn from Rahane, who led India to an incredible victory after being in the doldrums. The essentials of his leadership were lack of self-importance, good communication, trust in the team players (of all religions, no nationalists and anti-nationalists) which resulted in great cohesion and each individual giving his best. The government should repeal the CAA and stop actions like the “love Jihaad laws” being formulated by the BJP ruled states.
- Improve MSMEs. A committee needs to be established to devise an innovative policy to improve the state of the MSMEs. This would be vital for creation of jobs and growth.
- Improve Construction. A committee needs to be established to devise an innovative policy to improve the state of the construction sector. Incentivizing construction of housing through attractive loans could be just one idea. This would be vital for creation of jobs and growth.
- Monetize Idle Assets. Idle assets like “enemy land” and other idle land lying with Defence, Railways and elsewhere needs to be monetized to generate funds and increase economic activity.
- Don’t Increase Import Duties. India should not fall into the trap of the emotional appeal of “Atmanirbhar” just like US had fallen to the appeal of “Make America Great Again” made by Trump. It did not help US. India should make sound policies to reduce dependence upon China and unwanted imports but not create protectionist policies which we had done well to terminate in 1991. India should join the RCEP at the earliest. Increase in import duties deters investment.
- Increase Defence Expenditure. Security of India is of great significance. Defence expenditure has fallen under the present government. Security cannot be ensured or improved by propaganda as done on Rafale or Balakot. The energies of the CDS should be directed towards reforms and not towards proposing cuts in pensions. India needs to increase the defence expenditure.
- Legalize Betting and Gambling. It is high time that India legalized betting and gambling. It would generate good revenue.
- Tourism, Airlines, Hospitality, Malls and Restaurants. The government needs to come up with innovative policies to help these services because they have been badly hit by the pandemic and would take time to recover.
The budget is due soon and I hope to note action on some of the views shared above and give us reason to cheer.
- Prannoy Roy, Investor Ruchir Sharma On Top 10 Trends Of Global Economy (ndtv.com)
- Watch | Worst Is Over, Budget Should Aim to Raise Revenue Without Raising Taxes: PM Eco Adviser (thewire.in)
- ‘Worst Is Behind Us, but Economy Is Not in Comfortable Position’: Montek Singh Ahluwalia (thewire.in)
- Raghuram Rajan Interview: India Needs To Commit To Fiscal Consolidation (ndtv.com)
- GDP Growth | View: India may see freakish high growth in 2021 and three things in the big picture (indiatimes.com)
- International Monetary Fund’s Growth Projection For India: IMF Projects 11.5% Growth Rate For India In 2021 (ndtv.com)
- Indian economy likely to grow 7.3% this year, projects UN report (theprint.in)
- The 5 factors that will determine the shape of the Indian economy in 2021 (theprint.in)