New Government and the Old Challenges!

Now that the mockery and derision of campaigning days has died down and the Bharatiya Janata Party headed by Mr Narendra Modi as Prime Minister takes over the reins of administration, it is time for the new government to address the challenges being faced by the economy on top priority.  For, important economic indicators are already emitting red signs: GDP grew at 5.8% in the January-March 2019 quarter pulling down the overall economic growth rate for the fiscal 2018-19 to a five-year low of 6.8%. Further, it is feared that the prevailing liquidity crunch that was identified as the cause for fall in GDP growth in the last quarter of fiscal 18-19 is likely to continue in April-June quarter of 2019 too, which means a relatively slower growth even in the new fiscal. 

With the collapse of IL&FS, the NBFC sector has been hit by one problem or the other regularly, and is now facing acute liquidity crunch. Over it, owing to mismatch in cash flows they are finding it difficult to meet their own commitment to their lenders, thus raising solvency concern. The Central Bank is however reluctant to offer any kind of funding support to them, of course, for valid reasons. But the truth is, there is an incipient risk behind the whole problem of NBFCs: contagion risk, which can spread to other sectors too. It has already triggered trouble in mutual funds that hold debt issued by NBFCs. Even bank lending to NBFCs has slowed down. All this along with the threat of asymmetric information may hasten the spread of contagion risk to even the real economy.  Should this happen, domestic consumption, which has already slowed-down is likely to spiral down further. Commercial vehicle sales are in the negative zone for the last few months, passenger car sales fell by 17% in April, sales of two-wheelers fell by 17% in 2018-19, and consumer durables and fast moving consumer goods sales too have fallen. And, for an economy such as ours which is highly dependent on domestic consumption, any fall in consumption spending is certain to trip the growth further.  

During the past four years, business investment remained stagnant at about 30% of GDP. Even foreign direct investment has declined recently. Much of it is perhaps due to stressed balance sheets of corporates as well as the overcapacity in certain sectors. Unless this malady is addressed forthwith, no growth in GDP can be foreseen. But a revival in the investment climate can only happen if the banks are willing to lend.  And it is why the new government must immediately address the woes of banking sector that is saddled with unabated growth in NPAs and capital shortage. There is also a need for improving the governance and management of PSBs. Unless these issues are addressed satisfactorily, dispensation of new credit by banks may continue to be elusive. And so the growth too. Hence, government should send a clear signal to the markets about its intention to reflate the economy by doing whatever is needed, that too, on a sustainable basis.  

Amidst these challenges, every year the country is adding 12 million young people to the workforce. Besides pushing the unemployment rate that already rose to a 45-year high of 6.1% in the fiscal 2017-18 to a more alarming state, these swelling ranks are also demanding for proper skilling afresh to become fit of employability. Since economic growth and jobs do not necessarily go hand in hand, government cannot leave employment generation to the mysterious workings of the growth alone. And it must also be appreciated that welfare measures are only palliative while job creation alone is the permanent answer for the socio-political evils that we are plagued with. This obviously calls for adequate funding support for skilling and reskilling workforce to make them employable besides huge investments to revamp the public education system which is currently quite ill-equipped to reeducate India to counter the kind of disruption likely to be inflicted by the ongoing digital revolution. 

Power sector is another area where the government has to muster courage to reform the distribution system by adopting measures such as better metering, eradicating distortions in pricing the power and the energy inputs as well and better transmission systems to make the state-owned power distribution companies viable. The newly acquired political strength must be used by the present government to convince people to pay for the power consumption which alone can ultimately make the power generating units viable and turn into performing assets of banks. Along the way, government must also exploit alternatives for production of clean energy.

Simultaneously, Prime Minister Modi should address the plight of the farmers who are distressed by the falling prices of their output and rising costs of inputs and growing water scarcity. Any attempt in this direction should aim at improving the productivity of farmers by investing in new technologies and irrigation for that alone sustains improvement of agriculture longer, while adoption of easy options such as loan waivers, etc., would only “exacerbate the problem”. 

With the kind of thumping majority that this government has won, Prime Minister Modi should focus on modernizing India by reducing poverty while improving infrastructure, particularly road network that generates huge employment, by paving the way for active private investment via public-private partnerships by recalibrating contracts and improving the overall efficiency of the government. Having successfully launched GST and the IBC in his previous term, the government must build on it by continuously reviewing and improving them for effective delivery of the intended results. Heading to have a majority voice in both the houses of the Parliament soon, it is the right opportunity for Mr Modi to launch the much needed structural reforms in land ownership, mining rights and granting of environmental clearances to give a real boost to the private investment.  

Simultaneously, in the true spirit of federalism, the Prime Minister must steer the nation towards reducing the fiscal deficit of Center and States put together to 5% by 2023—a herculean task but that is what statesmanship is all about.