BackIndian economy sprouts green shoots
A close scrutiny reveals that several sectors of the economy are witnessing a nascent pick up as the incremental reforms are slowly beginning to pay dividends
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Last week, Reserve Bank of India (RBI) governor Raghuram Rajan claimed the economy was recovering and there were signs of capital investment picking up. Coming from an otherwise circumspect person, it should address fears that the Indian economy was a long way from recovery.
Actually, finance minister Arun Jaitley claimed last month that a turnaround was already underway, based on the spurt in indirect tax collections (customs and excise receipts normally reflect higher imports and factory sales, respectively). The following day, chief economic adviser (CEA) Arvind Subramanian sought a huddle with journalists outside North Block and reiterated the same claim. At that time, most believed that both were merely talking up the economy.
Similarly, analysts, who otherwise have been very disappointed with the Narendra Modi-led government for not pushing so-called big-ticket reforms, have quietly undertaken a rethink. Last Tuesday, I met up with one of these previously hawkish analysts visiting from overseas and was taken aback by his excited opening remarks: “Things are beginning to move on the ground. Finally."
In fact, over the last few weeks, several analysts have positively revised their assessments of the Indian economy. To be sure, nobody is claiming that the economy is firing on all cylinders. Far from it. It is just that several things are beginning to come together—and, as is always the case, some are accidental and others planned.
A close scrutiny would reveal that several sectors of the economy are witnessing a nascent pick up as the incremental reforms (most of which were structural in nature and hence not quick fixes) are slowly beginning to pay dividends. It is also apparent that the macroeconomic fault lines are less ominous—the RBI governor implicitly says so.
At the same time, the tailwinds from the moves undertaken to revive stalled projects, beginning towards the end of the United Progressive Alliance regime and carried forward by the current National Democratic Alliance (NDA) government, have begun to gain momentum. Anecdotally, we have known so, but now there is actual data backing this claim.
According to an HSBC Global Research study released on Friday, stalled projects both in value and as a proportion of overall projects have fallen for the fifth consecutive quarter. And more importantly, capital goods production is showing an uptick.
All credit to the NDA for focusing enhanced government spending on road and rail projects—both of which have a tremendous multiplier effect on the economy.
A Credit Suisse analyst report points out that India built 36,883km of all-weather rural roads connecting 10,990 habitations in 2014-15. This was the highest since 2010-11 and almost twice the target for the year, bringing the cumulative total of rural roads built to 437,000km, connecting 109,000 habitations.
Part of the reason the NDA has been able to do so is the expenditure rejig it undertook by opting for targeting of subsidies—beginning with LPG, or cooking gas. By seeding them with Aadhaar and the bank account, the government has been able to weed out illegal LPG connections.
According to the CEA, the savings in the last fiscal year would be ₹ 12,700 crore—about a third of the allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme in 2015-16. Money saved is money earned.
But even better is the news that targeting of subsidies can generate desired results and is not just a pie in the sky. Particularly relevant since the NDA announced on Friday that it was going to take targeting to the next level—its use in poverty alleviation programmes. It has chosen to bite the bullet, especially with respect to the country’s mindset of believing entitlement spending to be open-ended and perennial.
Using the Socio Economic and Caste Census 2011 (SECC), the government has evolved a deprivation matrix (another matter that this was conducted by the UPA, but kept on the back burner as it implied taking politically uncomfortable calls on entitlement spending).
While the erstwhile Planning Commission counted the poor by estimating the level of poverty—about 22% at present—the identity of the poor has always been a source of dispute and misuse.
SECC does precisely that. It identifies the poor and lists out their causes of deprivation—such as education, skills, housing, employment, health, nutrition, water, sanitation, social and gender mobilization and entitlement.
Accordingly, the policy response can now be tailored to address the specific deprivation of an individual, rather than the conventional approach of one-size-fits-all. It is like all of us cannot be sick for the same cause and consequently the care and medication would be different for everybody.
By linking this to the Jan-Dhan Yojana and Aadhaar, the government is creating an audit trail. This can not only prevent misuse, but also help track the impact of the social spending programme. This is something that will go down well with an aspirational society, especially one long used to being denied its privileges.
How does this fit in with green shoots? Perfectly actually. After all, fixing the leaking exchequer is critical in ensuring that the broken fiscal plumbing network is restored.
More bang for the buck as they say and better chances for the shoots to take root.
Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com. His Twitter handle is @capitalcalculus
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