A blueprint to revive demand and growth in the Indian economy

on 28 Nov, 2019

The FM would do well to speak more on this so that the investing community does not tar the central government with the same brush as the AP government(ANI Photo)

Finance minister (FM) Nirmala Sitharaman, in Parliament on Wednesday, said that India will not go into recession, and that some of the blame for the slow growth rested with past regimes.

The FM is correct in one respect. India’s post-liberalisation reforms, although significant when compared to the years before 1991, were, to a large extent, a result of the exploitation of low-hanging fruit. The outsourcing industry in India was a spectacular driver of job creation, on account of one-off advantages like a highly skilled group of engineers and a large English-speaking pool. Banking was another employment generator, with the growth of private banks. Real estate received a one time boost due to easing of the emergence of credit. These have paid off, but deeper structural changes are now needed. In the United States, approximately 63% of working-age adults are employed while, in India, the number is just about 50%. The thinness of employment explains why despite the very low levels of per capita consumption, demand is not growing and growth is slow.

As early as 2012, the International Labour Organisation (ILO) reported there was almost no net new job creation between 2004 and 2010. Some new jobs were indeed created between 2010 and 2012, but these were of a contractual nature and vulnerable to downturns, as we are seeing now. The weak demand visible now is an outcome of those years of weak job creation.

New job creation is important, as jobs are the major answer to the challenges of low demand, which in turn impacts growth. Manufacturing is the driver of jobs and, therefore, demand. Unfortunately, manufacturing, in contrast to the sectors mentioned above such as banking and information technology, requires high investment and has return cycles, which are subject to greater extremes of variability. It also requires one to place large amounts of long- term capital at risk. Investors will do so only if they expect a more than proportionate and sometimes (unjust) return to offset the uncertainties involved.

A government that seeks to accelerate growth has to encourage investment in manufacturing. While the government has tailored policies to incentivise individual industries, it must, in addition to tactical responses make public, articulate the philosophical premises that underpin its economic beliefs. This will provide the alignment around economic issues needed for the executive and the judiciary to act in tandem in pursuit of growth. Both organs of the State have the ability to drive or stifle the incentive for businesses to invest and grow.

There are several areas where such signalling could be done. One can clearly signal to the bureaucracy the green signal to take bold actions, even if some outcomes can potentially be challenged in a court. These can include the idea that officers will not be held responsible for bonafide acts. Another signal is a willingness to simplify business through a “trust and verify” approach. If the problem with such an approach is that it will be undermined by corruption in the lower levels of bureaucracy, a strategy to address that needs to be shared publicly.

More signals could be sent out that entire industries will not be allowed to be destroyed by the unintended consequences of judicial action. Recently, the Supreme Court fined the entire telecom industry. The government, to its credit, has formed a senior-level committee, but it could do more by being unequivocal that it will ensure that the industry will not go down. That is the language investors want to hear, and until India is in the global big league of economies, its national interest is best served by being investor-friendly in justified cases.

On another note, the new government in Andhra Pradesh (AP) has walked away from power purchase agreements. The central government has done well to commence the process of enacting laws that prevent states from terminating such contracts. The FM would do well to speak more on this so that the investing community does not tar the central government with the same brush as the AP government.

The courts have a major role to play in providing comfort to investors. The courts need to start sending signals that speedy contract enforcement will be given high priority, and that it will look dimly on litigants seeking to misuse small legal loopholes to vitiate the intent of contracts. The judiciary could be nudged to bring a sense of urgency to such cases, especially those with large commercial consequences.

One is not suggesting that the Centre should infringe on the executive right of elected chief minsters to change decisions, or that it should seek to exert any undue influence on the judiciary. But it should be seen to be taking strong, fair and confident positions in favour of investors and contract enforcement.

It should not be hesitant in over-communicating both its philosophy and its actions so that other institutions are aligned with the same growth-oriented goals. Investors are aware that market sentiment is half the battle. Greater communication of intent, in many areas, where the government is already acting, will go a long way in reassuring investors that periods of higher growth are only a few quarters away.

Govind Sankaranarayanan is former COO and CFO, Tata Capital , is currently vice chairman at ESG Fund ECube Investment AdvisorsThe views expressed are personal
This post was originally published in The Hindustan Times dated Nov 26, 2019