The most important thing is to acknowledge the economic slowdown. For the past six quarters, the growth rate has steadily gone down from 9.2 per cent to 5.7 per cent. Investment as a share of GDP, the kind that creates new businesses and factories, has been declining for five years. Job creation may not be just at a standstill, but jobs might be lost. To some extent this can all be viewed as the price to pay for structural transformation of the economy. The price is paid in terms of political capital. Long-term measures have been undertaken, which have short term costs, and can prove costly in electoral terms too.
A unified tax structure, direct linkage of farmers to buyers, attack on black money, determined effort to widen the tax net, financial inclusion, the move toward a less-cash economy, are all steps toward a stronger and more efficient economic system in the longer term. But the government might be guilty of completely neglecting the here and now in pursuit of long-term vision. After all, some of the jobs lost now are lost forever. Meals not served in restaurants during demonetisation won’t come back in the future. When prices of perishables like tomatoes crash to three rupees a kilo, they are not compensated by better prices in the future. Many daily wage labourers who did not find a job lost that livelihood, even if temporarily. Statistics confirm that all four basic drivers of growth (and spending) are sputtering: consumer spending, foreigner spending (ie our exports), investment spending (as described above), and now even government spending.
Economic revival is as much about psychology as about macroeconomic policy. Rising consumer and business confidence feeds off itself, and can lead to a virtuous cycle. The government and its spokespersons have as much responsibility in restoring, nay, enhancing that confidence, as in actually implementing growth enhancing policies. It helps to have credible promises and action plan, not just platitudes that all will be ok, and this pain is only short term. In times like these, it helps to refer to the eminent modern guru of economic policy, John Maynard Keynes. He understood that investors and consumers are as much moved by psychology as by economic incentives. When neighbours see economic dynamism, they assume something is going on, and are inclined to feel optimistic as well.
Indians by nature are optimistic, as revealed by many global surveys, but that is not helping in the current times. The 80-year old wisdom of Keynesian economics still holds, despite many attempts to malign or discredit it. It is also no use being alarmist on India’s already high fiscal deficit ratio. India’s debt to GDP ratio is middling, and eminently sustainable. The pause in fiscal restraint fits in well with the new conventional wisdom put forth by worthies like the International Monetary Fund (IMF) in the wake of the European debt crisis. There IS a price to pay for fiscal loosening. That price could be in terms of higher taxes in the future (to pay for new debt), or higher inflation. Both of these are acceptable costs. The unborn generation will bear a lower per-capita burden of taxes because of our demography. We can afford a slightly higher inflation rate, given that it has undershot even the Reserve Bank of India’s target band.
Finally, it is unfair to pin all our hopes on monetary loosening, and ignore the fiscal possibilities altogether. We need a well thought-out, well designed and implemented fiscal push now, not later.
So here is a list of fiscal options recommended as a much-needed timely fiscal package. First is recapitalisation of public sector banks. Burdened by NPAs, they are simply not in a position to extend new loans. This has caused credit growth to be at multi-decadal lows. The incremental credit to deposit ratio is deeply negative. Of course, we need not give the banks a blank cheque, so to speak. The recapitalisation could be tied to conditions and milestones, such as time-bound resolution of top ten NPAs, or speedy decisions on haircuts of stressed loans. The second area of fiscal priority is lower taxes. The corporate sector awaits the lower rate of 25 per cent. More importantly, the excessive excise taxation on petrol and diesel must be reversed. Granted it is in the domain of state taxes, and that it lies outside the ambit of GST council, but we need urgent relief on petro taxes. These are indirect taxes; they hurt the poor more than the rich, are regressive, do not give GST offset credit, and feed into generalised inflation through higher logistics and energy costs. There’s no point in filling the coffers of the governments and oil companies, and denying the benefits to the citizen. Please cut petro taxes.
The third area is that of affordable housing. That will need a subsidy, mostly in land cost and interest subvention. The land should be acquired by governments (that’s where the subsidy comes in), and housing loan interest rate can be reduced. The state of Kerala has a successful pilot which can be emulated. Maharashtra is also implementing a large project, which includes rental housing too. The fourth priority is a wage subsidy especially for labour-intensive sectors like textiles (weaving, spinning, garment-making), construction and tourism. The state of Odisha has successfully innovated a scheme for garment-makers which can be emulated. Last year’s textile package announced by the central government can be re-examined and expanded. The NREGA can be extended to the textile sector. Wage subsidy and national accreditation should be given to apprentices too (because most of the skilling is actually done as on-the-job training).
A fifth priority is exporters. The issue of delay in GST refund has already been flagged. An expansion of the MEIS and SEIS schemes could be looked into. The fates of manufacturing and export sector are interlinked. The sixth priority is farm incomes. Raising the MSP is a much politicised issue. But there are crops outside the ambit of MSP. The government must examine ways of providing floor price support, although this helps only those farmers with surplus to sell. There are many other specific measures to address the immediate need to rev up the economy. A fiscal push, in terms of lower taxes and higher government spending is an imperative.