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 postJawaharlal
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.
Source: Live Mint, India Tuesday, 21 May 2019