Only then can laggard sectors like agriculture and industry pick up pace; raising govt-spend not easy with taxes falling short
That prime minister Narendra Modi managed to pull off a second Lok Sabha victory despite the economy especially agriculture being in trouble and without enough jobs getting created is as much a tribute to his ability to change the narrative through the Balakot strikes as it is to the plethora of successful pro-poor measures he took over the last five years. Over Rs 2.3 lakh crore was distributed to the poor via DBT over the past five years, over 5 crore persons got subsidised life insurance and 13 crore accident insurance, 6 crore got free LPG connections, 1 crore subsidised houses were built, as were close to 10 crore toilets even if the economy had grown by 8-9%, the benefits may not have trickled down to the very poor for several years, but with Modi s successful anti-poverty schemes, they benefitted much faster; it can t be a coincidence that the BJP did well in most poor states.
But now that this unprecedented victory is behind him, what now? GDP growth is showing signs of not just plateauing at 7%, it could even go below that. Investment levels continue to fall and exports have risen by less than 5% over the past five years, and that acts as a brake on industrial growth. Increasing government-spend on roads and railways to raise investment levels is no longer an option with tax collections slowing meeting FY20 targets requires taxes to grow at 19% vs 11.5% in FY19. Indeed, with large off-budget borrowings, high de facto government borrowings ensure interest rates remain high and that, in turn, hurts private industry, especially SMEs.
Getting growth back, as in 2014, remains tough with India Inc strapped for cash and bank balance sheets shot getting out of a twin balance sheet crisis can take a decade, even more. Despite the new insolvency law, cleaning up India Inc s balance sheets is taking time; as a result, according to Credit Suisse, over 41% of India Inc s debt is still with firms that have an interest cover of less than one. And with plenty of bargain-basement deals available at the bankruptcy courts, a meaningful investment revival will take time.
What the economy needs, to even sustain a 7% growth is a fresh burst of reforms. The insolvency code is a big reform, as is GST (but it needs less rates to be effective), and DBT, JDY have reformed anti-poverty spending, but sweeping market-reforms are critical if investment, and hence GDP, is to grow.
Reforming direct taxes needs the removal of a plethora of tax incentives and must ensure the highest tax levels don t kick in at today s relatively low levels of income; without this, it is difficult to imagine tax-to-GDP levels rising significantly; more so since, with multiple GST rates, tax compliance is sluggish. In which case, tax-and-spend is no longer a policy available to Modi to boost public sector capex.
While little can be done about the impact of a poor monsoon or the slump in global prices, only creating pan-Indian markets will ensure farmers get a larger share of what consumers pay; according to Icrier professor Ashok Gulati, by not getting market prices, farmers lose around Rs 2.5 lakh crore a year. Also, while Rs 160,000-170,000 crore is spent every year on subsidies like fertiliser, interest subventions, electricity and water subsidies, these are mostly cornered by the top 10-15% of farmers; replacing these with a cash subsidy for India s 14 crore hectares of net sown area means an annual cash transfer of Rs 11,800 per hectare. Add to this, Rs 50,000 crore a year than can be saved if food procurement by FCI is stopped and all current food subsidies are paid in cash instead of through physical rations; FCI s excess food stocks can be sold for another Rs 1 lakh crore.
Also, once electricity and water, say, are priced at market levels, their consumption will correct and, as a result, the destruction of the water table that is caused by growing the wrong crop in the wrong area sugarcane in dry Maharashtra, for instance will stop. In other words, should Modi want, he can bring acchhe din to farmers quite quickly.
In the power sector, similarly, where 52,000MW of power capacity is stressed, the main culprit is the below-cost pricing of power, as a result of which state electricity boards can t sign new power purchase agreements, nor can they pay their dues that are already over Rs 40,000 crore. But if electricity subsidies are transferred by the state governments to everyone s bank accounts, electricity can be sold at market prices in the manner LPG is and, immediately, the power sector gets healthier and will attract more investments.
In the mining sector, similarly, thanks to unions such as those of Coal India, private investment is hardly welcomed the government allowed commercial mining of coal several years ago, but till date no private firm has been given a licence to do this. In the case of the oil sector that accounts for 28-29% of India s total import bill, government policy has been one of flip-flops even though the country loses out as a result. In the case of non-oil mining this accounts for a fourth of India s imports just 10% of India s prospective area has been explored vs around 95% in the case of Australia. If this is even doubled, according to Niti Aayog, this can create 5 million jobs by 2023, up from the current 10 million. Apart from huge delays in clearances, a big problem that Modi needs to fix is high government levies of around 30% of revenues as compared to global levels of just 8-12%.
Indeed, apart from RJio s predatory pricing, the same high government levies have killed the telecom sector; from 12% in 2011, the pre-tax government share of telecom revenues rose to 25% in 2018. Fixing this should have been relatively easy, and would have boosted investments also, but Rahul Gandhi s suit-boot-ki-sarkaar jibe frightened Modi into inaction. The economy is too fragile for Modi not to act; similarly, if quick moves are not made to reform India s labour laws hire-and-fire is just one part of them or if the government keeps hiking the minimum wages, this will further accentuate the jobs crisis; and it is not clear that, in 2024, the electorate will be as forgiving as this time around.