Nocturnal thinking more than animal spirits is required to up GDP

August 1, 2019 data released by the Government of India indicated a steep slump in India’s core sector. The 8 core sectors (feeder sectors for a developing economy) indicated their lowest growth in the last 4 years. This data is good to reflect that the economic slowdown is real and can be felt on the streets. This is also a good indication that there is lack of pickup in investment in the private sector and the Government. The index of eight core industries rose just 0.2% in June, down from 4.3% in May and 7.8% in May 2018. This has been the slowest increase since 2015. The slowdown has been progressive for some time now.

While the overall economic backdrop continues to be good despite the debated GDP numbers that range from 4.5 % as claimed by the former CEA now and 7 % as endorsed by him when in government! The lack of translation from good macros to strong micro’s is what has plagued the economy. This is the first clear indication that small entanglements at a sector level need to be addressed rather than massive reforms. Corporate earnings as a percentage of GDP in India has bottomed to 2 % from a whopping 7 % at peak. This clearly is an indication that a variety of levers have not done the heavy lifting they were expected to do in the economy. Some other commonly observed problems are, an Illiquid financial system, an indirect tax system that was rejigged but poorly implemented, Insufficient expansion of corporate tax base, high tax rates amongst others. The recent budget gave an incremental push to economic acceleration and most commentators of the economy feel that a lot of action will happen outside the budget to leverage from the policy and provisions made within. Indian economy is nowhere near its low of 1991-92. The key indicators are more than comforting. Forex reserves are high, Inflation is under control, Rupee is just under its realistic exchange rate etc. Global developments are providing a lot of opportunities, particularly the Sino US trade war. India is not able to leverage the opportunities for a variety of known reasons. I am expecting an economic review from the South block soon.

There is a need to relook at the mix of our economic model. As a country and with our entwined issues I believe we need a Hayekenian model with intermittent Keynesian interventions. Government should ideally create an environment for a classical model based on Hayekenian principles. It advocates growth through private sector investments. Government must spend more on infrastructure to accelerate private sector investments. For starters, it should stop capitalizing state owned companies that are inefficient and soak up cash without delivering capital appreciation. MTNL, BSNL and Air India are great cases in point. Government should liquidate their holding at realistic market prices. Along Keynesian lines of recommendation, the Government can over a very short term of 1 year evaluate investments to push the aggregate demand curve. That will help improve supply efficiency and the improved micros can take over. For this to happen the government should also reevaluate the effectiveness of its marquee programs like make in India. See what has worked and what has not. This program has lots of potential to deliver with appropriate associations and tax treatment. India should have a dedicated ministerial team to articulate India’s willingness to attract factories that are moving to Vietnam and Bangladesh. Suitable guarantees based on an assured revenue model and an efficient tax model driven by faster clearances can swing this to India.

This government had also planned to bring the entire industry under a 25 % corporate tax regime. It needs to do that immediately. It will be a step in the right direction. We need to bring in a lot of transparency in our taxation system. Investors have become increasingly vary and fearful of the system. In India a considerable amount must be provided in a corporate budget over and above the actual tax that needs to be paid. Faster settlement mechanisms need to be thought through. In the absence of faster settlement, liquidity and hence cash flow gets choked. Considerable amounts of reforms in direct taxes must be deployed. Similarly, GST in select sectors like automobile, hospitality etc. should be pegged at a lower value. Agriculture is another area that needs immense structural reforms. India is missing a great opportunity to be a food bowl of the world and this can really help the government in its welfare agenda too. A fine balance between Urban and rural India can be bridged by reducing stress on our cities. Indian government may not have fiscal room for direct cash infusion into the economy but the aggregate demand curve over the short term can be moved through indirect measures.

Indian economy can get back the boost it needs through consistent incremental reforms. It needs to stay focused on a Hayekenian model / classical model over a longer period while giving demand boost in the short term. Domestic investor sentiments need to be put in the top gear before making ourselves attractive to international market again. Most of the reforms need to be done at a micro level and outside of the budget. Growth will be back, and jobs will get created. Structural reforms on all fronts and a focused effort with speed on infrastructure will determine where India will be in 1-2 years’ time. Nocturnal thinking more than animal spirits will get us back to high single digit growth rates given the current monetary and fiscal situation.