Shall we resolve to face facts?
The birth of a new year (even if it is Gregorian) is as much an occasion for reflection and resolution as it is an occasion for optimism
Newspapers have triumphantly published the news that the Indian economy will be the fifth largest by 2018, overtaking both the UK and France and trailing only the US, China, Japan and Germany. This is based on the likely value of India’s nominal gross domestic product (GDP), measured in US dollars. It is unsurprising for a country of India’s size to overtake the economies of Britain and France. In other words, it is really no big deal.
In the new year, we should resolve to resist the temptation to worship false gods and celebrate superficial successes. While it is satisfying to cross a milestone, there are more reasons to feel chastened too. I will share a few facts that I came across recently. There is a message in them.
Much of the labour in India works without a written contract. Think of its implications. Second, we talk of financial inclusion. But it has taken nine years for India to set up a receivables exchange (since the idea was first mooted in 2008) where small suppliers can discount their receivables and free up working capital. Third, the idea of publishing an Annual Survey of Services Sector (similar to the Annual Survey of Industries) was first mooted in 2012. Five years later, it is yet to become a reality. We talk too early and too triumphantly and our delivery falls well short. For all its recent braggadocio, China kept its head down for more than two decades (from 1979) in the global arena and went to work on its economy. Therefore, even as we feel proud of being on the cusp of becoming the world’s fifth largest economy, we need to recognize that there are both serious long-term challenges and some formidable headwinds in 2018 too.
One year before the last general election in 2014, the Indian economy was in shambles. According to the Reserve Bank of India (RBI) data, in March 2013, India’s current account deficit was 4.8% of gross domestic product. The average inflation rate in 2012-13 was 10%. The combined fiscal deficit of the Union and state governments was 6.9% of GDP. The rupee went into a free fall in 2013. In March 2018, the current account deficit is expected to be 1.5%. The inflation rate will be just under 5% and the combined fiscal deficit will be around 6.2%. These are projections available from the World Economic Outlook of the International Monetary Fund, published in October 2017. So, the macro health check-up throws up no concerns, superficially. But to argue that, after nearly four years, the National Democratic Alliance (NDA) government has not done as badly as the previous government did, is a confession of failure, not a statement of pride. Further, near-term, the trend in each of these parameters is in the wrong direction.
Inflation is headed higher thanks to the creeping increase in the price of crude. Whether it has peaked and will crash depends on whether global economic activity turns down this year. That, in turn, depends on stock markets. If they crash, the price of oil will decline and that would help lower India’s current account deficit and inflation rates, even if its overvalued stock market too crashes in sympathy. But if tensions in the Gulf region escalate, the price of oil can travel north, remittances will decline and asset prices will still crash. That is a bad scenario for India in many ways.
The Union government is all set to confess to its failure to meet its gross fiscal deficit target of 3.2% of GDP. Even if the actual target is higher by 0.5%, it is not a disaster, per se. But the quality of the slippage is a matter of concern. Farm loan waivers by states and economic uncertainty induced by the Union government bear a large share of the blame. The latter has leashed economic activity and, hence, government revenues too. The argument given by the government in raising the goods and services tax on luxury cars from 15% to 25% is a lesson in Economics 101. The assumption that demand would remain unchanged and, hence, a higher tax rate would lead to more tax income for the government, is hugely problematic. That is symptomatic of this government’s approach to tax revenue mobilization.
Good governance requires both the government and the private sector to trust each other. The government began to travel down that path in the 1990s, but, since 2004, that reversed, and this government has strengthened the bonds of mistrust. In feudal societies, the onus rests more on the ruler to take the lead.
The latest Financial Stability Report of RBI warns that the problem of non-performing assets in the banking system is yet to peak. Consequently, capital formation rates that reached new lows in the fiscal second quarter (July-September 2017) may not recover much. Without that, the burden of growth will be shared again by the government and private consumption. The former is not good for fiscal health and the latter would add to the external deficit, besides ensuring that the national savings rate stays low. That does not augur well for a sustained pick-up in investment rates and, hence, economic growth rates. Thanks to the mismanagement of the previous government, the Indian economy went off the rails after the global financial crisis of 2008 (little consolation that so had others) and this government has not helped put it back on track. Worse, the question marks remain as big, if not bigger.
The birth of a new year (even if it is Gregorian) is as much an occasion for reflection and resolution as it is an occasion for optimism. It is time for all Indians—and not just the government—to engage in more of the former.
V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com. Read Anantha’s Mint columns at www.livemint.com/baretalk
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