It’s the biggest challenge for Modi Sarkar in six years. The current GDP growth rate of India (quarterly) is 5%, the lowest in more than a decade. Moody’s predict 5.8% for the next financial year, World Bank 6%, and RBI tells it 6.8%. Far away from the required 11%+ for a proposed $5 trillion economy by 2024. The government body, NSO, had noted earlier that we are in the worst job situation in the last half a century. India had already lost its title of the world’s fastest-growing economy to China in the previous quarter when its economic growth slowed to 5.8 percent compared to Beijing’s growth of 6.4 percent. And in this grim scenario, the RSS Supremo and ideological beacon for the government, Mohan Bhagwat, calls for Swadeshinomics.
Swadeshinomics, RSS Style:
In the last Dussehra address to the nation, Bhagwat says (paraphrasing), “There’s an economic crisis, but don’t make too much of it. Why paint the devil on the wall? GDP isn’t the only measure of growth. Crackdown on corruption, but don’t victimize the innocent. We believe in Swadeshi. Trade is global but we should only buy what we cannot make and need. Why import even cow semen from a Brazilian hybrid developed with an Indian native? Use Swadeshi. Exports are good, imports are bad, the RSS principle is of frugality, buying only what you must, protecting what you make from the competition. Foreigners can invest but learn from countries which insist on one native board member with veto rights. So, foreigners own the shares but power is with our government. On the other hand, see what’s happening. Our (new) companies are seen to be owned and run by Indians, but once you look deeper, shareholding is with the Chinese.”.
So, here it is.
But the Modi government is apparently moving exactly in the opposite direction. It is opening more areas to FDI, negotiating new trade arrangements, especially with America, and the RCEP closer to the region. It has also announced massive privatization as the mood-lifter for the economy. Both trade deals and PSU sales are being opposed by the Swadeshi Jagran Manch, as are new agricultural, especially seed technologies.
So what is the right way out? To get to that one needs to know why this slowdown.
To start with, private consumption has taken a beating due to Demonetization as consumers suddenly prefer to hoard cash or keep it in the bank instead of spending on consumer goods. Moreover, demand has also collapsed in the rural areas as the entire rural economy runs on cash and Demonetization led to the loss of jobs as well as incomes thereby squeezing the rural consumer who now prefers to wait and watch as well as postpone consumption except that of essential goods and services. Next, Demonetization has also led to small and medium businesses or the so-called SMEs to withhold investment since they too operate on a cash basis and the cash crunch has left them high and dry.
Added to this is the fact that most Public Sector Banks are saddled with high NPAs or Non Performing Assets that have resulted in them tightening lending and instead, seeking deposits and otherwise repairing their balance sheets by making provisions for Bad Loans.
Further, GST rollout has hampered the small businesses more than Demonetization by forcing them to withhold inventory until they migrate to the GSTN or the GST Network and become compliant with the numerous rules and regulations that are part of this tax, and which have kept changing several times in the last 15 months.
Then there is also a global economic slowdown that is happening and given the fact that India is a net commodity exporter, there has been a slump in the volumes of exports. The global slowdown has also been accompanied by a retreat of globalization which has resulted in FDI or Foreign Direct Investment is only in the areas of speculative finance and distressed assets purchases rather than into investments that help the Real Economy.
Lastly, the slowdown is also part of a longer-term structural shift wherein the Economy is shifting gears from the high investment era to a low investment era as well as a transition from being cash-driven economy to a digitally enabled economy. Indeed, this can be seen most in the Real Estate and Auto Sectors that have come to a grind in recent months and hence, have also contributed to the slowdown.
Going beyond, Roadmap Ahead:
Any economy fires on 4 engines: private investment (private sector investment into new projects); public investment (government investment into infrastructure and development); internal consumption (goods and services consumed) and external consumption (exports of goods and services). The measures ahead by the government and by the private sector need to address all of these four engines.
When the chips are down, the government has to take the lead with public expenditure. Public investment through infrastructure building, for instance, revived the US through the Great Recession. Infrastructure and allied industries-when pumped with demand-create demand in those sectors. India must do that with renewed vigor. If public investment starts firing up the consumption engine, even in select sectors to start with, it could substantially bridge the 25-30 percent gap in capacity utilization in various sectors over 3-4 quarters. Indian economy must bank on the huge billion-plus consumers who can revive the nation from the worst possible downturn with sheer mass and volumes.
Economists advocate factor market (such as land and labor market), financial market (credit or capital market) and regulatory reforms to address a slowdown situation. Faced with a structural demand problem, the cornerstone of growth policy should be to harness the demand at affordable prices of those earning at least the minimum wage. Rural India is often treated as a place where we solve the food problem, with the question of income and demand being relegated to residual status. But today, growth in rural incomes (including, but not limited to, doubling of farmers’ income) needs more macroeconomic attention. Public expenditure needs to be done to increase the purchasing power in the hands of the most underprivileged sections of the society through a myriad ways like ensuring 100 days of paid work under MNREGA, ensuring cheaper yet with quality public education and public health amenities (as being done by the Delhi state government), et al. The government needs to spend more on rural areas. Increasing rural people’s incomes can drive up the consumption demand, which in turn will boost the industry. To create more demand the Government needs to spend more in rural areas, the construction sector, and the unorganized sector.
Affordable housing is another sector where the private sector could profitably increase economic activity and employment, with demand for homes that those earning the minimum wage can afford to be the focus, rather than middle-class homes in suburban areas.
We make clothing in India for the rich but we import a lot of clothing for those earning the minimum wage from Bangladesh and Vietnam. Making the textile sector competitive to reduce net imports from such countries would provide a powerful demand stimulus to growth and employment.
Health and education are also areas in which there is latent demand from a much wider base than earlier. The rich now increasingly resort to health and education imports and so the business model based on their demand is failing. A structural shift to meet the demand for affordable health and education of reasonable quality for those earning the minimum wage would increase both economic activity and employment.
Even a weaker Indian rupee should not be a problem. The stronger rupee is hurting both the exports and the business. Imports are surging and they are eating into the domestic market share. India needs growth now, so there is no need for ratings as of now.
The recently announced monetary policy of RBI with several interest rate cuts has not given much relief to boost the Indian economy. The economists now advocate a steep rate cut in the benchmark lending rates to allow for monetary policy expansion. The Reserve Bank needs to cut interest rates further for banks, thereby making borrowing cheaper for the industry and spurring investment.
More certainty in the business environment is required. Businesses should be without shocks like demonetization. In fact, after demonetization shock, there is an environment of uncertainty in the economy. This stops the private sector short of announcing the new projects. There should be an environment of certainty that no such disruptive moves would rock the economy in the near term.
For some quick measures to boost the economy, one can ask for the following: give auto sector incentives to invest and shift to electric vehicles, incentives to auto sector employees to upskill on electric vehicles, change GST collection to quarterly for companies below Rs 1 crore, reduce the GST slab rates and ideally make one nation one tax a reality (say 10 or 12% GST across board and focus on strict compliance rather than higher rates), adopt the Direct Tax Code, cut income tax for the bottom slab (at least income tax relief till Rs.6 lacs annual income), improve credit flow to both consumer and industry, reduce real interest rates by 135 basis points as cost of capital has to come down (some reductions are done already), and change the credit culture in public sector banks.
Interestingly the private sector can still make money in a slow-down economy which in turn helps revive it. Companies for whom the distribution channel is non-existent will be less impacted by the slowdown. One can see this clearly in the way the slowdown has not impacted Asian Paints, Berger Paints, Trent and Westlife (McDonald’s). Similarly, Amazon, Flipkart, and DMart are not experiencing any slowdown.
Companies that sell essential products (eg. baby milk powder (Nestle), blood tests (Dr. Lals), and adhesives (Pidilite) will be less impacted by the slowdown as households throttle off on discretionary consumption. Companies that finance SMEs’ working capital needs will be severely impacted by the slowdown. Many of these lenders seem likely to go out of business. At the same time a massive brand new opportunity — channel financing for dealers, distributors, manufacturers operating in the white economy — will open up for smart, well-capitalized lenders. One can reckon that Kotak Bank, HDFC Bank, and Bajaj Finance can capitalize on this opportunity.
Companies that are able to pull market share from their competitors will be less impacted by the slowdown. Structurally, the biggest winners across sectors are companies who are able to understand the drivers of the changes and move adroitly to consolidate market share in their sectors.
The author is a columnist and television analyst and is currently the Pro-Vice-Chancellor of Kolkata based Adamas University, having been earlier the Dean of Symbiosis and Amity Universities, Pearl Academy and Whistling Woods International.