Leverage Points in the Indian Economy

Every Cricket fan vividly remembers the time when Mahendra Singh Dhoni comes to bat when India is chasing a big total. Off late, most of us, at some point criticize the former Indian Captain for a slow start while the asking rate climbs and the opposition tries to put pressure on the chasing team. While the target is always there in bold, but we feel Dhoni rarely is on the correct course to achieve that. But the former Indian Captain always finds a way re-calibrating his path and emerge as one of the most successful finishers in world Cricket. Similarly, the Apollo, they say, was off-course for 97 per cent after leaving earth but it still got there in the end without a delay and without any fuss. There must be something about these brains that they appear to be off track to people at large but always reach the destination at the end well in time.

Well, there is no second thought on the current slowdown in the Indian economy. The GDP and IIP numbers validate the overall sense of gloom and each day we come across increasing numbers of NPA and NBFC crisis. Today, barely there would be a sector that would not have faced this heat- let it be FMCG with biscuits and shampoo sales going south, automobile sales hitting record low and Real Estate players sitting on loads of unsold inventory. While this contagion is working at its best across sectors, there has to be an epicentre of this sluggishness, from where this epidemic spread to all sectors.

The structure of our economy is such that the 2 leverage points in the system are Agriculture and Real Estate. The composition and nature of Indian economy is such, even if one of them performs well, the economy does well. Currently, both are going through bad phases which turned out to be longer than anticipated and the domino effect took care of rest. The engine of growth since past 5-6 years has been consumption and in the current scenario, when incomes aren’t increasing much, the way out to boost consumption is Debt. The banks on the other side aren’t keen on expanding their balance sheets due to problems discussed each day on debates on every news channel. Moreover, households too aren’t very keen to take on more debt fearing failures to repay in future on account of a grey business outlook.

Coming back to the 2 leverage points, let us examine agriculture in more detail. As per a report by Government of India, output from Agriculture, Forestry and Fishing, the share of Agriculture and Allied Sectors as a % of GDP at current basic prices has reduced from 18.5% in 2011-12 to 17.9% in 2015-16. For the same period, crop as a % to agriculture, forestry and fishing has come down to 58% from 62.4%. The only bright spot is the milk and milk product segment which grew at a CAGR of 11% and produced 32% more output than paddy and wheat combined.

On Real Estate, it is no-brainer that over the years, many people from rural areas migrated to urban areas and became a part of the casual workforce mainly involved in construction. This change happened across the country adding lakhs of workers in the workforce who were earlier employment in agriculture but not contributing much. Till a few years back, the big construction projects were in full swing and these migrants found a source of livelihood without much struggle. With the real estate sector facing strong headwinds, many companies have cut corners by employing fewer workers and thus it led to a cascading effect in the rural disposable incomes, which were already plagued by headwinds in agriculture.

While the government has been very proactive tackling the slowdown by announcing series of measures. The corporate tax cut, angel tax exemption and the FDI reforms are welcome moves and widely appreciated. The rate cuts by RBI over the past 18 months are a step in the right direction as it would help the aggregate demand pick up faster and bring back the growth to pre slowdown levels. What is important is to go beyond the quantum to the specific areas that need attention. A reduction in tax would help firms across the spectrum and make India an attractive investment destination across the world. But for the moment, the need of hour is to identify the leverage points in the economy and focus on them. Leverage points are places within a complex system where a small shift in one thing can produce big changes in everything. And for our economy, the leverage points are clearly Agriculture and Real Estate. A direct assault on the factors hindering these two spaces would bring multiplier effect and to that extent, the recent 25,000 crore fund for Real Estate sector is a welcome move by the government.

Rural infrastructure is another area where reforms have to come in, better connectivity of villages would boost farmers income. Agriculture requires supply side measures as a supply shock in agriculture translates into to demand shock for rest of economy. Onion Prices are a classic example to how supply shock in agriculture impacts rural consumption. All measures to boost aggregate demand can work only if launched in conjunction with supply side reforms in agriculture.

We need to keep in mind the target of $5 trillion economy by 2024, as put forward by our PM. Not all quarters the GDP numbers would rise, nor each day we would see Sensex or Nifty soaring new heights. There would be times when the economy might seem off track but the policy makers, like the Apollo, need to ensure we hit the target and thus keep a track of our course at important junctures.

*The views are personal and have no bearing to my work or any organization.