Economic priorities in a protectionist world
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Budget season is upon us again. The breathless conversation about magic bullets continues unabated even though it has been a long time since budget speeches have led to any significant change in India’s economic speed or direction. This budget follows numerous earlier ones with grand pronouncements combined with inconsequential change.
Rather than getting worked up about one budget gimmick or another, it will be more useful to focus on structural priorities in the context of a global regime shift. This new global regime (see: “Once Again Politics Matters”) means that countries are more inward-focused, with a political promise to protect jobs, reduce imports and substitute fiscal for monetary tools. In such a regime, India needs to focus more on itself and use the opportunity to restructure and reform even as the world regards India as a (relative) beacon of hope. Here is a non-exhaustive set of priorities:
Macroeconomic stability: Even though the budget initiatives are insipid, India is macroeconomically stable with moderate inflation, low current account deficit (approximately 1% of gross domestic product, or GDP) and a modest fiscal deficit (3.5% of GDP in 2016-17). By and large, the Narendra Modi government has maintained the National Democratic Alliance’s (NDA’s) focus on fiscal moderation, as was the case under the previous NDA government led by Atal Bihari Vajpayee. However, India still runs a shameful revenue deficit of about 2% of GDP and successive governments have not undertaken to eliminate it—a top priority for credible macroeconomic performance will be to target a low current account deficit and a small but positive revenue surplus. Reduction and targeting of subsidies (fertilizer in particular) should continue to the point that its impact is modest on the overall system.
Skilling, employability and jobs: India has tried many different approaches to the skilling and employment problem over the years—almost all ineffective. Over 10 million youth enter the job market each year. Add that to a cumulative pool of several tens of millions of unemployed and underemployed youth and you have the makings of a demographic time bomb. The latest budget adds a new alphabet soup of initiatives to this: STRIVE, SANKALP and SWAYAM. The only real hope is long-term and that is to both strengthen the quality of primary education and have an industrial strength apprentice and vocational training system in India. Short-term fixes with catchy acronyms distract from the long-term goal of a population that can read, add and write at the appropriate levels and that can be properly bifurcated into an academic and vocational stream at high school. While manufacturing can and should be a focus for jobs, the Make In India hoopla diverts attention from fixing practical challenges for large-scale employers such as housing, transportation and employability of labour.
Infrastructure: This NDA government has the right DNA for infrastructure. That preference is manifest in the progress on roads, rail and minor ports. The highway and rural roads programmes continue and progress has been made in both ocean vessel and inland shipping infrastructure—though much remains to be done in trans-shipment capacity. The rail ministry is led by a competent minister and despite some setback on rail safety (inconclusively tied to terrorism), impressive strides have been made in thinking about how to prioritize and fund revenue and capital expenditure. The capital required to modernize Indian Railways— complete broad-gauging, electrifying comprehensively, updating signals and upgrading passenger rakes and railway stations—is huge. It will have to be done bit by bit rather than in a big bang but the process has begun and must continue in a sustained manner. A modern, more connected and efficient inter-state rail system combined with city metro rail can energize India’s commuter, passenger and goods economy. The emphasis on affordable housing is welcome but more needs to be done to encourage supply delivered by ethical, value-based developers who can join the surging number of affordable housing finance companies that already exist.
Institutions: The piecemeal strategy to fractionally reduce government ownership in public sector companies does nothing to improve governance and is merely a chimerical approach by successive governments to fund shortfalls in budgets. Meaningful governance change can only come if company managements can be changed, are held accountable by market shareholders and are allowed to participate in wealth creation through carefully designed employee stock ownership plans. The public banking sector could become a real constraint if the gaping recapitalization wound is allowed to fester. The government would do well to follow several recommendations made in the P.J. Nayak banking governance report several years ago. Only time will tell whether the multilayered political compromises in the new goods and services tax have dramatically weakened its impact at birth. The government deserves full credit for the relentless promotion of digital initiatives and the India stack—low-cost delivery has already begun to make a difference in inclusive financial access, micro-credit, payments and insurance. Retirement savings must join this financial thrust so that India can create deep pools of long-term money. Only with domestic savings in India’s private and public markets can we reduce the dependence on foreign capital.
P.S: “Know thy self, know thy enemy. A thousand battles, a thousand victories,” said Sun Tzu.
Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand