Prime Minister Narendra Modi (Bloomberg)
Prime Minister Narendra Modi (Bloomberg)

Opinion | The national focus needs to be on the economy now

Should it win a second term, the NDA should get right down to pursuing urgent economic reforms

More than 50 different exit polls in Australia were proved wrong in the surprise victory of the coalition led by the Conservatives. This is in a country whose population is barely 2% of India’s. Three years ago, the outcome of the Brexit poll in Britain also shocked most of the forecasters. Not only did the pundits get it wrong, but even the punters, who put their money where their mouth is, got it completely wrong. Apparently, five times more money was riding on a non-Brexit outcome. After Brexit came the surprise victory of US President Donald Trump, who defied all experts in not only defeating competitors from his own Republican party, but also a strong and well-funded rival from the opposition Democratic party. There’s a lesson in all these outcomes, but it is not obvious. Is it that people have started being coy of truthfully answering the questionnaires of exit pollsters? Is there a deep distrust of the so-called elites, who dominate and control the narratives on media, and even social media? Is this a sort of revenge of the silent majority, the unseen undercurrent? This is enough fodder for political scientists and sociologists for years to come.

As of writing this column, it appears most likely that the National Democratic Alliance will cruise to an easy victory in the Lok Sabha elections just concluded, and Prime Minister Narendra Modi of the Bharatiya Janata Party will return to power for a second term. If so, it would be an unprecedented outcome, much like the one in 2014, which was also unprecedented. This would be the first time in the post-Jawaharlal Nehru period of Independence that a party is given a second strong mandate by voters in the absence of an extraneous factor like a sympathy wave or a single dominant theme. A second term would be a time for consolidation and for reaping the gains of investments, physical, social and financial, for the ruling party. However, it should be clear that the economy needs urgent attention and top priority.

The latest monthly economy report published by the department of economic affairs in the finance ministry highlights a highly worrisome three-year trend. Gross domestic product (GDP) growth has been steadily declining from its peak of 8.2% three years ago. The last quarter figure was 6.7%, and if it declines further, this would be a four-year trend. This is at a time when world growth is quite steady and improving.

Second, the country’s investment-to-GDP ratio has remained stagnant at 28% for nearly four years. It was at a peak of 38% in 2008. Clearly, we need to move it up at least a couple of percentage points, which would translate into investments of nearly 3 trillion. The challenge, of course, is that this has to come mostly from the private sector. That would mean urgently addressing debt issues in such large sectors as power, telecom, and civil aviation. It also means ensuring that the contribution of mining in GDP doubles. India is rich in mineral wealth, but all of it lies beneath the land or sea and does not translate into jobs, investments, and incomes. The manufacturing sector is seeing tepid growth because of lack of perceived demand, pressure from imports, debt-stressed balance sheets, and most importantly, still-unwieldy regulations that hurt the ease of doing business. State and local regulatory requirements are still a significant drag. Labour- intensive sectors such as textiles and garments, construction, agro-processing, footwear and tourism need a leg up. The footwear industry was disrupted by new laws on cattle slaughter and transportation. This needs to be modified.

The third trend evident from the ministry’s monthly report is on the current account deficit. It has risen steadily in the past three years and is closing in toward 3% of GDP. The net growth in exports over the past five years was zero. This can be attributed to a variety of factors, not all oaf which can be fixed easily. However, surely zero-rating of the Goods and Services Tax (GST) on exports is essential. Or at least instant refunds. The cost of delayed refunds completely wipes out profits and this especially hurts small and medium entrepreneurs. The still-strong rupee is also an export impediment. All of East Asia and China rode their export-led growth for decades on the back of an undervalued currency. Surely there’s a lesson in that?

India must also aggressively explore the possibility of rupee-linked trade with Iran. Paying for imports of Iranian crude oil in rupees does not give the sellers access to hard currency dollars, so this should not displease the US, if that is what is preventing rupee trade. India must also aggressively woo tourists, especially from China, as this will also go some way towards reducing the bilateral trade deficit.

The fourth trend in the monthly report is the decline in agricultural output, or gross value added (GVA), over three years. We have to aggressively promote farmer producer companies with downstream linkages with farm production, with the use of tax and other incentives.

Lastly, India’s current fiscal situation is quite bleak, as the headline numbers hide the true picture. This is slow acting poison, but is surely detrimental to medium and long term growth. The dust will soon settle on election outcomes and celebrations and a honeymoon period will begin. That’s the time to move decisively ahead and spend some early political capital on hard decisions that need to be taken on economic reforms.

Ajit Ranade is economist and senior fellow, Takshashila Institution