By Vivek Pattanayak in Bhubaneswar, November 17, 2019: For last several months there are reports in the media that the Indian economy is on downhill slope. From the World Bank, IMF and Reserve Bank of India on one hand to rating agencies like Fitch and Moody and the Centre of Monitoring Indian Economy (CMIE) which monitors the Indian economy, all these institutions indicate that the growth rate is coming down. Our trade deficits and current account deficits are on increase.

Exports are falling. Manufacturing is declining. Core sector is down with coal output having plummeted. Consumption of electricity is twelve year low. Fiscal deficit is likely to go beyond the budget estimate. Unemployment is the highest in last several years. Many public sector companies are saddled with heavy losses and high debt burdens, the most prominent being Air India and BSNL. Telecom sector is going through a financial crisis with huge burden of payment to government.

The recent decision of the apex court on Adjusted Gross Revenue has adversely affected most of the industry in terms of its viability. It is expecting the intervention from the government in their favour by way of grant of instalments and other reliefs etc. Vodaphone has expressed its intention of pulling out of India. Banks are saddled with huge non-performing assets. Non-banking financial institutions called “shadow banks” have collapsed. Bank credit growth has come down from 13.3% to 8.5% in one year and NBFC credit has fallen from 12% to 4% during the same period according to ICRA.

Market does not have enough liquidity. Free cash flow with the Indian companies which reflects cash left after meeting operating and capital expenditure is six year low. This would mean investible surplus is tight. Bond yield is increasing. The bond price and yield go in opposite direction. Consumer price index has made upward movement reflecting that inflation may be in sight. Rate cuts by RBI may taper down. Exchange rate of the Indian Rupee is the lowest vis-à-vis dollar in several years. The rating agency, Moody has downgraded India outlook showing as negative from stable. There are many reasons for falling GDP including demonetization and botched implementation of GST and global macro-economic factors.

India’s domestic production of oil cannot match its demand hence there is import of crude oil. Demand of oil is increasing, and it is unyielding no matter what efforts are made to bring in renewable energy. Pressure on foreign exchange reserves is also unabating. Price of oil which had gone down from 2014 onwards started steadily increasing. US sanction on Iran will prevent India from importing from that source. This means India’s manoeuvrability in the oil market is restricted. OPEC influences production level. There was decision sometime back to reduce production. This can affect the price which is also sensitive to geopolitical tension in the area and the world. US, which in the past was dependent upon Middle East for its supply, is more independent after it started producing shale oil.

In fact, India is also buying oil from USA. Therefore, it is no longer constrained by dictates of OPEC and the Middle East while India is susceptible. Other source is Venezuela which is under restraint. Oil has fluctuated between $35 to $120 per barrel in the last twelve years. Now it is around $55 to $60.If there is abnormal upward mobility of the price, India would be hard hit. Unless our exports increase there would not be assured Foreign Exchange reserves to meet our oil requirements which are vital to our economy. We had seen very difficult and volatile situation around 2012- 2013 due to skyrocketing of oil prices.

Our defence requirements are also dependent upon imports. The local defence industry is unable to produce cutting edge weapons. Private sector is yet to make entry in any visible manner. There is a big gap between allocation and requirement in this sector. There is talk about monetization of defence assets like land in cantonment to raise money for meeting the gap. Some have suggested that cess should be imposed on taxpayers.

The Indian economy is not island unto itself and is connected to the global economy. Trade tension between USA and China, uncertainty over Brexit, sanction on Iran, and political tension between Europe and Russia are having effect on the economy of the world. Slowdown of the Chinese economy is visible. Unabated unrest in Hongkong, once known as global trade capital will have long term effect. Even US economy does not show vibrancy in recent months.

In Europe there are signs of downturn including Germany which was the main driving force in Europe. The economists say there is an impending global recession reminiscent of 2007/8 economic crisis after sub-prime housing bubble burst took place. Some say Baltic index which reflects international trade and commerce is not encouraging since long. Global demand has been arrested. Therefore, Federal Reserves in USA is reconsidering whether to resort to Quantitative Easing, so does European Central Bank. Interest rates have reached almost zero level. There is dark side of negative interest rate.

The RBI has been resorting to rate cuts for quite some time to spark-off investment. A huge amount of the reserves of the central bank (Rs 176 trillion) have been transferred to the central government amidst a lot of criticism to bail out the government. In addition, RBI has passed on its usual dividends to the government. Fiscal deficits can be met by this process. Huge tax cuts have been announced by the government to encourage spending and investment. This by itself may further accentuate fiscal gap. Most recently to give a boost to realty sector, a funding mechanism has been crafted.

There is divided opinion on the subject whether India should or should not join now or in future the Regional Comprehensive Economic Partnership which would integrate the ASEAN economies with the economies of China, Japan, Australia, New Zealand and India. There was apprehension that as it is there are large trade deficits with ASEAN countries and other players in RCEP, and if India would join this trade agreement there would be wider trade deficits as the cheap Chinese goods would flood the Indian market. This reflects that our goods are less competitive.

Many argue that a country aspiring to be five trillion-dollar economy must have a target of one trillion-dollar export by 2025.Our exports have not grown since 2013. Barring world class products by way of tariff enhancements is counterproductive in the long run. Freer flow also helps in improvement of efficiency and technology. The recent WTO decision on export promotion schemes has not been favourable towards India. The Indian industry should therefore have to find out ways of making its goods and services globally competitive without subsidies and promotional schemes. Industry and the government must sit together to have serious dialogue to get out of this gridlock. Investment in R&D must be given priority by industry, academia and government institutions.

In the background of this scenario, IMF has stated that India in south east Asia would lead the global growth by 2040.Growth rate of India continues to be high in comparison to many developed and emerging markets. The World Bank Index of Ease of Doing Business has made a spectacular upward movement. Stock market is vibrant and booming with steady inflow and outflow of Foreign Institutional Investment.

While these can give us encouragement, but one should be realistic .2040 is twenty years from now. Any cataclysmic global event can frustrate our optimism. While small improvement in growth rate in US and China makes enormous impact because of the size of the economy, India needs a double-digit growth rate to catch up and provide employment adequately as the labour market is increasing in size every year although many economists and analysts have reservations as to whether any growth rate beyond 5% is realistic. Improvement of ease of doing business index is based only on information and process collected from Mumbai and Delhi.

There is however a grim reality of a yawning gap in this field in the country. Stock market covers a miniscule part of the population, less than 1% as against 60 % to 75% in the Western advanced economies although the saving rates are high in India. In absence of financial literacy programme, the domestic savings are channelized towards gold, other precious metal, real estate and land. Poor and innocent people are often victims of fraudulent Ponzy schemes.

Now what is the way forward? Unemployment needs must be addressed with right earnest since this has tremendous socio-political implications. If one goes by the recent history there have been riots and unrest in Arab countries known as Jasmine revolution or Arab spring started from Tunisia, otherwise a developed country because of under employment, and followed by unemployment in Egypt.

Now the riots in Chile and Bolivia which ousted its indigenous President Eva Morales should open our eyes. The fundamental underlying factor is employment. Since private sector behemoths are not investing, government has therefore to take the initiative. There are huge vacancies in the government including police, paramilitary and defence establishments. The State Public Sector Banks also have huge vacancies. Although digitization will ultimately assist in improving efficiency since many customers need service with human touch as they are not digital friendly, the filling up vacancies in the Banks will be immensely helpful.

MSME sector creates huge job opportunities apart from giving a big boost to GDP and export earnings. Investment in sheer size is less for every project. Banks do not suffer from NPAs in big numbers. Angel funding helps Start-ups but the sector needs hand holding through clearances from government promotional agencies. State Financial Corporations and State Promotional and Investment Corporations need to be revived to serve as non-banking financial institutions with refinancing from SIDBI and Mudra. Financing should be based on detailed technical, financial, managerial and even economic appraisal to be done by professionals. This will prevent unviable projects from receiving credit. Close monitoring is an absolute must. This is an insurance against sickness, and it will avoid loans becoming sticky or unrecoverable affecting the health of the financial institutions.

Many large and heavy industries have become unviable causing NPAs for banks and financial institutions because of delayed land acquisition, environmental clearances, and local agitations for variety of reasons. Bankruptcy code is undoubtedly a right mechanism to resolve. However, decision making is crucial to any solution. Haircuts are important in the decision-making process. Bankers are not confident of taking decision as they are afraid of future investigations, prosecutions and harassment. This malady extends to civil service and public sector undertakings. Political will is necessary to revive the confidence of public servants.

Tourism is another sector which creates employment, contributes to Foreign Exchange earnings and GDP, and therefore the sector needs to be given the priority it deserves. Hotels, resorts, restaurants, roadside facilities, access to tourist destinations like beaches, hill stations, religious places and historical and archaeological sites will create employment and increase production of steel, cement and aluminum.

Rural tourism and development of medium sized and small agriculture-based industries including construction of cold storages and warehouses whether in public or private sector, will generate rural employment and reduce distress by providing access to market. The Finance Commission has rightly observed with rural roads and other amenities rural economy can be truly vibrant.

This will prevent pull from rural areas to urban centres which is causing congestion and pollution in the cities and towns where there are inadequate housing facilities to look after the newly arrived people thus creating illegal tenements and encroachments.

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