The election results this time round will be remembered for a ‘khaki’ campaign in which Modi and his supporters dominated by convincing the Indian society that an alert chowkidar can keep the country safe from terrorists, anti-nationals, and infiltrators. A deliberately engineered social phenomenon dominated the political and economic issues in the run-up to the Indian parliamentary elections. Amicable withdrawal of the RSS from social media and politics (almost six months prior to the elections), consolidation of caste and religion based vote banks, fracturing the Muslim mandate and the much propagated protection of the country from anti-national forces secured a berth for BJP at the centre for the second time.
But now when the BJP-led NDA is in power, it must change the course of economic policies so that India becomes a global economic powerhouse. There are certain pressing concerns which need to be addressed immediately.
Fourth quarter of the fiscal year 2018 that ended in March 2018 saw the GDP growing at 5.8% vis-à-vis the third quarter in which it remained at 6.6%. In fact, the GDP is showing its slowest expansion since the first quarter of 2013. Already, the Asian Development Bank and the Reserve Bank of India (RBI) have revised their estimates for India’s GDP growth for the year 2019-20 from 7.4% to 7.2%. Recently, a G20 surveillance note also cut down the estimates for India’s GDP growth from 7.5% to 7.3% for 2019-20. Taking cognizance of the slowing economy, the RBI (like the earlier two attempts) cut down the policy rate by 25 bps in June 2019. But decreasing the rate of interest will prove futile like the earlier attempts. Real crisis is vested with the banks which are unwilling to lend on account of high Non-Performing Assets. Even the Non-Banking Financial Companies (NBFCs) are hesitant to float the credit owing to their massive exposure to the real estate sector, which is not showing any recovery. Thus, decreasing the interest rate by the RBI is nothing more than lip service.
In order to take the right steps to revive the economy, we need to understand the magnitude of the problems with which the economy is grappling. At the outset, there is a decrease in private consumption which represents more than half of the Indian GDP. Private consumers, both at the urban as well as rural levels, have different reasons for their decreased purchasing power. At the urban level, the demand has gone down due to the slowing down of exports (countries imposing trade restrictions) and sluggish industrial growth owing to the non availability of credit (because of mounting NPAs). In the rural sector, rural distress hovers around the slow surmounting of the effects of demonetisation and GST along with low sale proceeds of last year crops. Accordingly, people are getting forced to withdraw their savings, the testimony of which could be had from the statistics which indicate that household financial savings have fallen by about seven percentage points of GDP from 23% of GDP in 2011-12 to about 16% in 2017-18.
The corporate sector is also feeling the heat. Automobile giants like Bajaj Auto, HeroMotoCorp, Maruti Suzuki, and Ashok Leyland all have seen their sales and profit margins going down. Similarly, FMCG companies like Hindustan Unilever, Dabur, and Britannia are also facing the consequences of a low market.
Some may point towards the stimulation of the fiscal policy, which means more public investment in projects like MNREGA leading to more jobs, more purchasing power, and more investment. It has the tendency to crowd in the private investment sector, which may further help to revive the ailing economy.
Increase in investment by the government means overshooting the fascination for fiscal deficit. In that case, the foreign investment to India will decrease as credit rating agencies will downgrade India’s rating - the immediate result of which will be the widening of current account deficit. Also, it is difficult on account of fall in the recent GST proceeds and e-tax filings. Statistics show that in May this year, GST proceeds stood at `1 lakh crore against `1.14 lakh crore in April 2019. Similarly, income tax e-filings in FY 2018-19 remained 6.68 crore, down from 6.74 crore in the previous fiscal. Thus, fiscal profligacy may not be an easy option to exercise. Diagnosis of the problem calls for sturdy decisions from the side of the government.
First, we need to introduce trade controls as has been done by the US which has recently nullified our special trade treatment. It will have a double effect. On one hand, our imports from the US will decrease (promote indigenous production of good imported) and on the other, it will help us to get rid of the unnecessary instructions wherein we are being forced to import oil from countries other than Iran. In both these cases, our balance of payments will get strengthened. Simultaneously, we also need to promote the export of internet based services like online tuitions and medical services. Second, Small and Medium Enterprises (SMEs) should be given cash refunds under the composition scheme in GST. It is perceived that demonetisation and GST has hit the SMEs at large, curtailing their employment capacity and handing over the markets to big players - as a result of which our stock markets are booming. Allowing cash refunds for the inputs purchased by the SMEs may help to revive this sector.
Third, we have been successful in keeping cordial relations with Maldives and Afghanistan. But we have almost lost our old allies like Sri Lanka, Bhutan and Nepal which are now more dependent on China. In order to make Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) successful, it becomes imperative that the Modi government should make efforts to win back India’s old allies and Bangladesh. For this, we can philanthropically lend them the services of our doctors, teachers and scientists. Such a stance can also sort out our problem of unemployment.
The author is Associate Professor, Institute of Management, C/o DAV College.