The Slowing Economy Need Unconventional Shakeup

There is no denying the fact that the Indian economy has slowed down in the recent past. GDP growth rate has come down, factory output has been subdued, demand remains muted and international rating agencies have downgraded their forecast for the Indian economy. There are news stories about layoffs by employers and that sales of passenger vehicles has dipped to an unprecedented level has been cited as an indication of how bad the situation is. But is it all that worrying? Has the economy fallen into recession, and if not, are we staring at an impending recession? Technically, we are not and this is because the growth rate has remained positive and it will remain so no matter what. This cannot, however, be an excuse for policymakers to brush the matter under the carpet and remain idle at a time when the thunderous victory in Lok Sabha elections places the onus on them to better the economic landscape of India. That the government has acknowledged this slowdown and has simultaneously made its intention known to undertake corrective measures shall come as a relief for all stakeholders. Corporate tax rate cut, ease in filing GST returns and other measures are all a part of this exercise.

Before we know why the Indian economy is facing the heat and what can be done to overcome the present situation, let us also know that the economic slowdown hasn’t hit India alone. From Germany to China, every economy is reeling under slow business activity and this can be attributed to a variety of reasons. One key factor behind the global slowdown is the protectionist stance of many countries, in particular, the United States. World’s largest and second largest economies, the US and China respectively, are engaged in a bitter trade war where both the counties have levied high tariffs on each other’s exports citing trade imbalance. One must know that this not only impacts the factories of these two belligerents but also other countries that engage in trade with them. And hence, India has suffered the collateral damage. Another factor is Britain’s impending exit from the European Union. Brexit, as it is famously termed, has brought uncertainty in the economies of Europe, many of which are major trade partners of India. Many other factors, including US-Iran tensions and even the outbreak of coronavirus in China, play part in halting the economic progress.

The reason why India’s slowdown has grabbed headlines, with even the International Monetary Fund citing India’s sluggish growth as one of the key reasons why the global growth rate will be lower than expected, is because India held the reputation as the fastest growing major economy and the wide consumer base of the country has always been a draw for global businesses. The latter is the rationale for inflow of dollars in India as foreign direct investment and portfolio investment in shares and debt securities of country’s listed businesses. Indeed, India’s growth slowing down has repercussions for the world at large. But within the country that even today has a sizeable portion of population below the poverty line, the impact of slowdown will be felt more acutely. The political party presently at the helm has been voted again in 2019 on the back of reforms and policy actions taken by the cabinet in the first term. From digitising the public distribution system that has helped the Indian economy to weed out corruption and plug leakages to bringing a law that fasttracks insolvency of sick companies for the benefit of lenders, the government actively undertook reforms.

But the continued slide in the GDP growth rate in past many quarters provides ample of reasons for the government to pursue new goals in order to reverse the trend and put the economy back on track. That the public sentiment is decisively in the favour of the ruling dispensation cannot undermine the need to perform well on the economic front. This, however, does not mean that nothing has been done in this regard to this day. In the last quarter of 2019, the government announced steep cut in corporate tax rates believing that savings on part of businesses will lead to higher private investment. A credit guarantee scheme for supporting the ailing NBFCs and HFCs was unveiled, public sector banks were recapitalised, realty fund was created for funding stalled projects and on its part, the RBI announced a new external benchmark for loans that could ensure passing down the pluses of reduced policy rates to banks’ creditors. True, however, it is that the economy needs some more boosts from policymakers in order to deliver on the expectations of all stakeholders.

What more can be done? One bit that the government shall address is the subdued demand forces in the economy. Demand is all what it takes for the economy to grow. More the demand, more will be the production, leading to more businesses entering the market to compete against one another and all this eventually leading to job creation. This is a virtuous circle that thrives on positive sentiments. Today, demand is at a record low. Reasons are many. One can say that since consumers are left with no extravagance spending capacity due to muted wage growth, demand isn’t picking up. Addressing this needs wise understanding of India’s economic landscape. While traditional businesses in the manufacturing sector aren’t the best payers in the job market, it is the services sector, especially the information technology industry, which has fuelled the rise of the Indian middle class. IT services are a new field when compared to other conventional industrial jobs and the rise in the demand of these services did not only generate jobs in India but also became one of the prime sources of our foreign exchange earnings. Infact, the IT industry can be said to be the biggest driving force of the Indian economy for past many years.

But the question is for how long can we depend on the IT industry or other sources of revenue to fuel our economy? Time is ripe for the policymakers to consider establishing new industries that have the ability to cater to the global demand. Let’s, for instance, take the electric vehicles industry. China is leading the world in this category and is the top exporter of most of the components that are used in the production of an electric vehicle. From lithium cells to battery management system, China leads the pack, even outshining European and other advanced markets. But where does India stand? The answer to this question is gloomy. Although production of EVs has picked up in the domestic market with many car and two-wheeler manufacturers having unveiled their products in recent past, the sad truth behind this is that almost every battery pack that lies at the heart of an EV comes from abroad. Aren’t we then missing on producing a good that is set to have huge demand in near future? Aren’t we then losing jobs to China, which is exporting EV components to across the globe? Aren’t we losing on the current account front where our trade imbalance with China is already a matter of concern?

Second, it is time the country rethinks its love for public sector undertakings. When India attained freedom, the then Prime Minister famously likened PSUs with temples. From production of coal to retailing petrol products and from insuring lives of Indians to lending them money, the government is seemingly in every business we can think of. But is it the government’s business to be in business? May be, but not at all at a time when mismanagement in public sector banks has led to rise in non-performing assets and frauds and when output of private peers has clearly and decisively surpassed that of public sector companies. One can compare Cairn India with ONGC and JSW Steel with SAIL to know more. And this is just the tip of the iceberg. By undertaking divestment on an unprecedented scale, the government can not only generate revenue, it can address the current economic slowdown as well. Here’s how. Reduced role of government in commercial activities will bring inefficient PSUs and PSBs to pursue efficiency. Healthier companies will not only compete well in the international market, they will also produce more jobs given the commercial success that they will achieve.

Many more policy actions are due on the part of the government to revive sentiments. Most of these actions are regularly debated and include a rethink of India’s bureaucracy that hasn’t quite performed on its part to be an enabler for Indian businesses. One can suggest bringing down personal tax rates to boost demand but this again is a debatable issue given the strain it will have on India’s revenues. One can also suggest further cuts in policy rates by RBI to bring down cost of credit for businesses. One can even say that the government can reduce its spending on military equipment and build more roads and highways to achieve both infrastructure creation as well as employment generation for the poor. These measures, however, are not only complex, the gain accruing from them can be short-lived. For Indian economy to achieve better results and come out of the prolonged slowdown, bold reforms are the need of the hour. The government needs to focus on new tech, including electric vehicles and blockchain, and make them the replacement for the IT industry that is fast losing sheen. At the same time, ailing public sector needs a complete makeover.