Indian Economy: Advice for FM/PM
Indian economy is in a bad shape. After the recent budget several respectable corporate personalities have come out and stated so. The government has been denying existence of the problems to save face or worse still that it has no desire to resolve them. To counter the views of some prominent sane people the government gets one eminent person (Jalan) to state that the problems are cyclical and not structural, implying that all is well and nothing needs to be done. This is bad for India. In this blog I have tried to explain the major economic problems of India and have suggested practical solutions to them. To get acquainted with the issues please listen/read these:
- https://www.business-standard.com/article/pti-stories/slowdown-cyclical-growth-will-pick-up-in-1-2-years-jalan-119080400194_1.html (I am convinced that what Jalan is saying is not true; it is sad that he said so!)
Understand Some Simple Basics
Major aspects which determine the economic development of a country are:
- Natural resources. Natural resources are a relatively stable factor for any country. India is well endowed in terms of natural resources.
- Quantity & quality of human resource (HR). The over 1.3 billion population which is largely young and in productive age is called India’s demographic dividend. The quality of HR is poor. India has to increase the public expenditure on education. It would make sense for Modi and all the states to emulate the example of Delhi. Please compare the availability of natural resources of India and quantity of HR with Japan or Singapore & you will realize the significance of HR in determining the economic development.
- Capital formation. Capital formation involves land, building, machinery, power, transportation, and medium of communication. Producing and acquiring all these manmade products is termed as capital formation. Capital formation increases the availability of capital per worker, which further increases capital/labour ratio. Consequently, the productivity of labour increases, which ultimately results in the increase in output and growth of the economy.
- Technological development. Technological development helps in increasing productivity with the limited amount of resources. Countries that have worked in the field of technological development grow rapidly as compared to countries that have less focus on technological development.
- Social and political factors. Social and political factors
play a crucial role in economic growth of a country. The divisive politics of Modi and spread of conventional beliefs and superstitions by him and BJP government are detrimental to economic growth. Godrej just said a little about these. Also note the negative impact on beef and leather industry by the RSS sponsored views. Unfortunately, in today’s Hindutva driven India, even talking about such things is termed “anti-national.”
- Domestic demand/exports. Domestic demand/exports fuel GDP. In India’s case it has primarily been domestic demand and exports in the case of China which have boosted GDP. Since exports are down & Indian industry is quite uncompetitive, we have to focus primarily on domestic demand.
Fiscal Deficit & Capex
Keynes had advised the simple method of increasing capital expenditure to increase and improve infrastructure as a great way to increase GDP and employment. It also has a great multiplier effect of boosting economic activity. Please use RBI reserves, foreign borrowing or whatever and invest about 1% more of GDP of public funds to resolve this crisis. This may increase fiscal deficit and increase inflation. In my view this will be a very small price to pay for a greater good. Please read this report:
The sad but true statistics of the agriculture sector are that approximately 44% of India’s population is contributing only 17% to India’s GDP. Hence the best and most sensible solution is to redeploy about 30% of this population (approximately 40 crores!) into the manufacturing and services sectors. Since the state of the other sectors is also so bad and unemployment state so acute that this is impossible in the next 5-7 years. PM Modi can, however, do the following:
- Provide full support to MGNREGA and ensure timely payments to the volunteers.
- Promote establishment of cold food chains and FDI in the sector to reduce the losses of 40-60% in fruits and vegetables in transit and storage and bring the losses closer to the 5-7% in the developed world. If India could do this for milk, it can also do it for fruits and vegetables.
- Ensure implementation of “Crop Insurance Scheme”.
- Promote the “Irrigation Schemes” and schemes like the soil testing to help the farmers.
Lending Capacity of Banks/State of MSMEs
The lending capacity of banks & NBFCs have been severely affected in recent times. MSMEs employ over 60 million people, contribute 45% of industrial output & 40% of exports. These were adversely affected by demonetization, GST and availability of credit. FM has stated plans to resolve these issues, MUDRA loans and so on. I only request the PM to please ensure that these plans get executed effectively. Please read this report:
Please read these reports:
Goel said in 2014 and again in 2016 that India will stop coal import in 2-3 years. The 2-3 years period has passed. India needs the thermal power, also needs to save the foreign exchange and also needs the jobs in mining & we have plenty of coal reserves.
Taxes/ Interest Rates
RBI has been lowering the interest rates. This is good and very much a need of the hour. Further reduction in interest rates would be welcome. It would be prudent for the FM/PM to listen to the demands of the corporate leaders and reduce the taxes and not threaten the corporate with policies like the one announced for CSR.
Reduced Aggregate Demand/Consumption
Reduced aggregate demand/consumption is a major problem for India’s economy today. These have been discussed in the you tube references quoted above.
The few suggestions given above would put more money in the hands of the people and increase demand/consumption and have a multiplier effect on the economy.
Government to Get Out of Business
Government has proved to be inefficient in handling businesses. Government must disinvest with conviction. How long will the taxpayers keep supporting Air India?
Real Estate/Telecom & Aviation Sectors
There are serious problems in these sectors and corporates are losing money & hence the sectors which should have seen the entry of more corporates and growth are becoming a drain on the corporates that are involved. Government should talk to the corporates and evolve policies to end the losses being suffered by the corporates & also improve the services.
Corruption & Transparency
Indian elections of 2019 were the most expensive in the world. If we compare the election expenditure to GDP ratio then we are world beaters by a margin. This is nothing to be proud of. Bringing an effective Lok Pal, strengthening the RTI Act and terminating the opaque electoral bonds scheme are vital steps. These points are important; hence I am raising them. I know fully well that PM Modi will never act on these suggestions.
I agree with all the important corporate leaders who have risked being attacked by the vindictive Modi government to express constructive criticism. With the current policies we are heading for 6.5 to 7% GDP growth in the next 5 years.
The above suggestions, if implemented, will definitely improve growth, reduce unemployment and put Indian economy on track for 8% plus GDP growth (despite no action on corruption & transparency as suggested).