India Markets closed

Tracking India's economic slowdown: Country needs meaningful transition policies; simple demand and supply games won't do

Madhavan Narayanan

Editor's note: This is the second part of a multi-part series in which Firstpost's columnists will analyse the ongoing economic slowdown and offer solutions.

How do you explain the paradoxical situation in which India is building 30 km of highways per day but the automobile industry is in a deep crisis? How do you understand the contradictions of a nation that promises "housing for all" by 2022 aiming to help the poor get roofs over their heads, even as the real estate industry grapples with a huge inventory of 1.2 million unsold homes?

Take a deep breath. Market economics works on the principle that demand and supply have a way of catching up with each other. But governments and regulators exist because growth has to be orderly in a manner in which bottlenecks to growth are removed, and downturns do not become an existential crisis in industries or companies that deserve to exist.

In India's current situation (still the world's fastest-growing major economy), it is possible to view an intended recovery as a simple business cycle problem, one that will go away as private players follow the classic rules of capitalism. Sadly, that cannot be so easy because in a nation of 1.3 billion people, there is still large-scale unemployment on the one hand and unfulfilled aspirations on the other. Simplistic demand-and-supply approaches work better in mature economies, but even there, one is not sure. Donald Trump would not have become the US president were it not for an unemployment crisis in the "rust belt'-- and his troubles are far from over.

The way out of the current mess in India could be transition policies that address pain points that are industry-specific. But this cannot happen through ad-hoc consultations with business leaders to come up with short-term solutions, as seems to be the case. What India could do with is a framework where policy-makers can identify the phase where an industry is on a time cycle and create a carrot-and-stick regime in which we can separate the bail-out candidates from the cop-out laggards.

From the 2016 demonetisation of high-value currency notes in Prime Minister Narendra Modi's first five years in power to the current plan to boost electric vehicles, the common characteristic is a desire to do too much too soon on the fiscal, technological and monetary fronts. You can't be firing on all fronts at the same time. The NDA government cannot be undoing the sins of the past and doing the right stuff for the future without a clear idea of the sequence in which things must be done.

Let us take the automobile industry to get an idea. Interest rates have fallen thanks to a benign inflation regime, but an attempt to tighten the fiscal deficit has created a demand crunch -- enough for the industry to suggest that a million jobs are at stake. But the NITI Aayog is busy pushing a plan to make electric mobility pervasive and mandatory by 2030. Meanwhile, Millennials may be opting for Ola, Uber or other shared mobility options that alter the demand pattern for car purchases. All this happens while Delhi, Mumbai, Bangalore and Chennai routinely face traffic jams.

This is just the kind of logjam the government can address through a transition policy. By studying the current situation as well as future opportunities, a comprehensive framework can be created. A temporary bailout can help an industry -- but one that combines an option that makes a transition to newer technologies inevitable. An array of tools exist to help a transition policy: customs duties, direct taxes, subsidies, depreciation rates, employment/labour policies, training/tooling regimes and even government-backed venture funding. The trick is to fit them into a roadmap.

On the other hand, the government has a right to ask why there are no mergers and acquisitions happening in the automobile industry if it is in such a crisis. In market economies, the strong buy out the weak. If that is not happening, we may be looking at a regime in which industries routinely go with begging bowls to the government to push up demand.  A transition policy must also look at the larger corporate sector dynamics. Some academic papers argue that government policy can drive mergers and acquisitions. Studies suggest government intervention in M&A  can be both positive and negative. A meaningful intervention can make all the difference.

Like in the case of automobiles, in real estate, is it anybody's case that builders serving affordable housing for the poor and developers sitting pretty on an inventory of overpriced apartments should be treated on a par? In full-employment developed economies, that may be an affordable luxury, but some kind of differentiation may be necessary for an economy like India.

Much akin to the automobile industry, new pressures on the industry such as the one brought about by the Real Estate (Regulation & Development) Act (RERA) may be positive for customers but what we see on the ground is a divergent scenario: while end-users have moved inches forward after struggling at the Supreme Court thanks to pre-RERA practices that cheated home buyers, there have also been reports of small builders struggling to find funds from non-banking financial companies (NBFCs) thanks to RERA restrictions. Consider the fact that NBFCs are themselves in a crisis thanks to an overhang of the bad loan (non-performing assets) problem in the banking sector.

Meanwhile, policing RERA implementation has been posing its own challenges. What we have now is a directionless gridlock that simplistic market economics cannot easily resolve -- unless we think fumbling and bumbling are par for the course.

Like in the automobile industry, there is a case to establish a transition regime in real estate to help the government balance its long-term policy objectives with the industry's short-term challenges.

The current situation in the auto and real estate industries are emblematic of what could happen in any industry in which a combination of fiscal, financial and technological factors can throw up problematic situations. This is here transition policies framed by the government can help.

Ideally, the NITI Aayog should be crafting meaningful transition policies-- well beyond the simplistic evangelisation of new technologies that it is currently so fond of. For all we know, in doing away with the Nehru-era Planning Commission, the Modi government may have thrown the baby of strategic planning with the bathwater of bureaucratic control.

(The writer is a senior journalist. He tweets as @madversity)

Read Part 1: Tracking India's economic slowdown: Why Narendra Modi govt shouldn't delay fiscal stimulus to revive struggling industries


Also See: Passing of triple talaq bill a distraction; Modi govt needs to urgently address issues driving India's economic slowdown

Tracking India’s economic slowdown: Why Narendra Modi govt shouldn’t delay fiscal stimulus to revive struggling industries

Economy shows signs of structural slowdown: Govt must work on urgent stimulus plan that Budget couldn’t deliver

Read more on Business by Firstpost.