Forging a comeback

Prime Minister Narendra Modi, on Thursday, held consultations with economists and industry and business representatives seeking their ideas for turning around the lagging economy. He was soliciting ideas to this effect for incorporation in the forthcoming union budget.

The exercise is in a sense unique. Today's discussion on the union budget was held without the union finance minister, Nirmala Sitharaman, attending. It is the finance minister who is primarily responsible for formulating the union budget and management of the economy.

If the prime minister chooses to hold budget consultation without the finance minister in the loop, the question naturally arises, is the finance minister on the way out? Does she no longer enjoy the confidence of the prime minister in her ability to manage the economy?

Such presumptions surface because the reason which has been put out was that Nirmala Sitharaman was discussing budget matters with the party functionaries, which does not really hold much water. That meeting could just have been postponed.

Her absence was all the more vocal because while the finance minister was absent in budget consultations, the union homes minister and a clutch of other ministers were in attendance.

Maybe, this is also an indication of the utter straits in which the government is caught over the poor performance of the economy. Earlier this week, the National Statistical Office released the GDP figures showing economy to grow by 5 per cent in 2019-20.

The prime minister struck a positive note in his address, observing that the Indian economy had powers to absorb and spring back into high growth trajectory. A concerted action was needed for that. But what actions? Because regardless of whatever steps the government has taken, the economy is still limping.

In a way, the steps taken already are the principal drags. A deep cut in the corporate income tax in the hope that it should kick up private corporate sector investment has been belied. No fresh investment from corporates has followed. Instead the government had lost revenue and thus its options for fiscal steps have been further constricted. So then, what?

Basically, the government was seeking ideas to push up the growth rate and ways of achieving it. Open-mindedness is welcome. The government had invited Dr Shankar Acharya, former chief economic adviser, who was in the finance ministry in the critical days of 1991-92 economic reforms days. But there were two others, namely, N.K. Singh and Montek Singh Ahluwalia.

Advisers and advice aside, the Indian economy was growing at a high rate for years. So much so, that we came to think that was the normal level of performance for the Indian economy. Maybe, it had in fact settled into a high trajectory. However some of the ill-advised measures, suddenly taken by the government, had acted as brakes. Demonetisation and hasty introduction of GST are being attributed as principal causes.

Both these steps had hurt the extensive informal sector of the Indian economy, without in any way helping the formal economy like big corporates or business houses. The informal sector is important for setting the pace of the economy because in its aggregate impact these numerous small and tiny units generate the income that provides the grist to the mill. The disruption in the informal economy and their loss of momentum had created a demand vacuum.

Following demand recession from a large section, including the farm and sectors allied with farming (like agro trade), there was a fall in off-take from established industries and thus their investments in turn went down.

Additionally, very low farm price inflation, in fact, in several instances, disinflation in farm goods, had sucked out buying powers over wide swathes of the economy. These developments were happening silently over the years. The end result was that both overall savings and investments fell sharply.

Some of the economists have suggested as an immediate measure, putting more buying powers in the hands of the people. Since incomes have been adversely hit by demonetisation and GST, it has been suggested to relaunch the income schemes and leave more money with the people. This might also involve some tax concessions.

Unfortunately, for the government, given the adverse financial situation and stress, there appears to be little room for committing fresh expenditure on income schemes and pump the rural economy with public investment.

Some of the Leftist economists, as well as some industry representatives, have urged the government to go soft on fiscal targets and increase expenditure even in the face of rising fiscal deficit.

Nonetheless, some kind of demand creation through government subsidies and creation of purchasing capacity could at best be short term measures. In the long run, secular growth must be self-sustaining.

Here it is important to analyse the weak points in the performance of the economy, as revealed in the National Income Statistics. The principal cause for low growth rate of the GDP is the complete failure of the industrial economy and more particularly, manufacturing sector. This vital segment has to turn out reasonable performance if the economy to return to a high growth trajectory.

Manufacturing sector growth has been estimated at 2 per cent. During earlier episodes of high growth, we have seen that for high overall growth, very high levels of growth of the industrial sector, pivoting on the growth of manufacturing, was essential.

Failure of manufacturing growth is a failure of the government's overall thrust. It may be recalled that the prime minister himself had given a call for "Make in India" in course of his Red Fort speech couple of years back. However, nothing seems to have happened and in fact manufacturing growth has further slowed down.

But that calls for very deep and difficult reform measures. It is doubtful if the government has the gall to launch such a string of reform measures, including land acquisition laws for industry and infrastructure as well as some labour law changes.

Views expressed are strictly personal