By Vivek Pattanayak* in Bhubaneswar, September 14, 2016

The global economy going through a period of “secular stagnation” to quote Larry Summers since collapse of housing bubble experienced an unexpected jolt, a severe tremor, and disconcerting uncertainty after Brexit in the background of the slowdown of China.

Although stock markets have recovered effect of shock has not disappeared. Apprehension among the investors, traders, businessmen, banks and financial institutions continue as future relationship between Britain and European Union is yet to be negotiated and settled.

This has come in the background of mayhem created by repeated Islamic terrorist attacks in Europe which had faced an unprecedented exodus from the Middle East only a year ago. Complexity has been exacerbated with civil war in Syria and rise of monstrous ISIS and lack of consensus among the big powers about whom to support in civil war. Tension in South China Sea and also confrontation over Daiyu/Senkeka islands, and Korean peninsula would contribute to the global political aggravation.

Economy and politics are interwoven. No wonder for the aforesaid reasons and deep rooted systemic factors like aging population, low birth rate and asymmetric economy between north and south and east and west, and a common currency without a political union, Europe is not growing. USA, although showing signs of vibrancy, has to wait till the outcome of the presidential election. Whether Federal Reserves will modify rate is unpredictable.

India, a beacon of hope according to IMF, more globalized since 2008 world-wide financial crisis cannot escape the global economic scenario. It has slumped in GDP terms to 7.1% as against a target of 7.4% although an optimistic prediction of 8% growth had been made by Arvind Panagariya, Vice-Chairman of NITAYOG only a few days ago based on the Monsoon forecast.

Core sector growth came down to 3.2% against 5.7% a month ago with sharp decline in electric generation, moderate production in coal, sluggish growth in mining, construction and agricultural sector. Construction industry has been in doldrums for quite some time with creation of NPAs in Banks making them incapable of lending although most of the problems have been created due to non-payment of dues on account of disputes.

There is a fiscal deficit which is 73.7% of target. Recent pay hike would add pressure to the deficit. Announcement of hike in minimum wage by 42% in non-agricultural sector and outflow of funds to pay arrears to the government employees would add to the inflationary pressure. Diesel and petrol prices have already gone up. With the change of guard in the Central Bank, all eyes are focussed on what would be the monetary policy.

First, inflation target has to be adhered to, particularly when there is no guarantee of improvement on supply side. Next task would be to design an innovative monetary instrument which would spur growth without affecting consumers’ price index.

External borrowing is slowing down. Corporate debt is doing well but not as well as used to doing the past. Corporate bonds come mostly from private placement, almost 90% and not traded in stock-exchanges. Bond yields are falling although there is no change of interest rate. Will it not result in reduction of small savings rate, EPF and PPF rates affecting small savers and workers?

What does fall in bond yield mean? Does that mean some systemic problem in the economy? Rupee has been the worst performer after Yuan vis-à-vis dollar in August in the Asian market. Fitch rating put India at BBB in December 2015, lowest investment grade, almost junk grade. Rating agency predict that Brexit would affect growth. Foreign exchange reserves appear to have reached the highest level but after recalibration. One has to wait and see how exit of US$20 billion in next few months on maturity of deposits of the non-resident Indians will have impact on reserves. There is impending hike of rates by Federal Reserves and possibility of capital flow to safer havens from the emerging market.

At the same time, Nikkei India Service Purchasing Manager Index has gone up in August since July although trend in employment remains comparatively subdued with decline in jobs since last September. Recruitment in Start Up has slowed down with IIT having blacklisted 11 Start Ups. There has been growth but jobless growth in the economy, it is alleged.

Latest study on global bourses reveals that an asset class stocks are better in twenty five year period. During this period the Indian stocks are next best to Shanghaiing last 10 year the Indian stocks have outperformed the Shanghai stocks although many foreign investors and Credit Suisse think that they are overvalued. In this background, it is worth mentioning that Mid Cap and Small Cap returns as indicated through price per earning have been remarkably attractive.

In this context , it is worth examining what policy makers have done so far and what can they do in short term, also in medium and then in long term. There is absolutely no doubt that a number of measures have been taken to bring structural economic reforms including liberalization of FDI and the latest of the reform being GST which has received global adulation among the investors in addition to launching of Make in India, Start Up and Stand Up India, Digital India, and making exercise to improve Ease of Doing Business followed by Prime Minister’s relentless effort by moving from country to country to attract investment almost in the same way Lee Kuan Yew did in the sixties and seventies when Singapore was expelled from Malaysia and had to walk alone.

Global economy is awash with funds. Even then big business is still not coming forward to invest for variety of reasons. There is lack of killer instinct. Big behemoths are risk averse due to market volatility, regional political tension, over regulation and pervading fear psychosis of unknown area. Example of Posco, and Vedanta in Odisha will speak volumes about their experience. Bureaucracy is somnolent if not demoralized unwilling to take risky decision for fear of investigation. Atmosphere is haunting scams of UPA days. Multiple institutions are in the field before finality of decision. Recent judgement on Singur will have its consequences on foreign investment.

Courtsey – The Economic Times

Knowing very well that global investors are not readily coming forward, rightly emphasis has been laid on MSME sector through Start Up, Mudra funding and as very timely mentioned recently by Nandan Nilekani that government should take initiative to create “fund of funds” activating institutions like SIDBI. Even erstwhile SIICs and SFCs, now almost moribund must be resurrected by States. Initiative for schemes like seed capital and risk capital of the yesteryears of IFCI and IDBI need to be revisited.

Over dependence upon Angel funds will not rekindle growth and certainly not usher in vigorous growth as they are not generally based on philanthropy. Initiative of Ratan Tata, Nandan Nilakani, and Vijay Kelkar to start Avanti is an exceptional step. Failure of projects is inevitable and should not be viewed in negative terms. This is a global phenomena. This should not discourage Start Up. Entrepreneurship presupposes risk taking and getting into unknown. Finding exit route and newly conceived bankruptcy code are steps in the right direction.

Young entrepreneurs between the age group 30 and 40 will have ability to take risks and success of MSME will depend upon them as long as project ideas are available and at initial stages there is hand holding. This sector gives maximum employment, contributes to GDP next only to agriculture and contributes substantially to foreign exchange earning in India.

Tourism sector, in particular in hospitality industry, there is immense possibility for job creation. Both domestic tourism in short term and international tourism in medium and long term can be an area of focus. Swatcha Bharat is a necessary precondition for sustained inflow of foreign tourists although not sufficient. Congenial environment for security is paramount. Minimum investment can generate maximum economic activities. Development of airports using existing airstrips and unused derelict airports of the British days and constructed long back will create infrastructure for regional connectivity based on newly announced civil aviation policy. Rising middle class in India will propel tourism both domestic and international. Tourism and civil aviation have symbiotic relationship.

Construction industry, a prolific job creator, can be revived with measures like resolution of disputes which have blocked funds from the government and PSUs. Ways to resolve disputes are many, starting from judicial adjudication to arbitration, and include conciliation, and negotiation. Executives of PSUs and civil servants have enormous professional skill to resolve disputes. While arbitration can be time consuming process, may be less than adjudication, conciliation and even negotiation can be attempted to resolve disputes. Executives of PSUs and civil servants as long as they will take self-speaking reasoned decisions should be encouraged to resort to negotiation to resolve disputes.

At the level of the government both centre and States, political executives must show courage to revive risky decision making ability among civil servants. Wrong decision is not necessarily a foul decision. Multiple agencies of vigilance and investigation need to be trained to differentiate between the two. Everybody is wise in the hindsight. In the populistic society and in the age of hyperactive media, for political executive, it is a tall order but without that ease of doing business will remain merely a paper exercise.

Although India is a country of savings in contrast to Western economy, in recent past it has not been spectacular. Excess money earned usually goes to acquire gold and silver, land and real estate. It does not go towards stocks, mutual funds or bonds. No wonder less than one percent of household in the country participate in stock exchange while in the Western economy it is more than 50 to 60%.Therefore, retail trade in stock-market is robust in the advanced countries.

What is worse in India is that surplus created in rural areas land up in fictitious Ponzi schemes in absence of organized financial literacy programme. Whatever financial literacy the people gained was through growth of regional bourses which have been closed down since new policy emerged for encouraging large sized stock exchanges. How wealth can be created by way of investment in stocks is well recognized more so through Mid Caps and Small Cap has already been demonstrated above.

For last two decades there has been enormous outflow of professionals and skilled people to USA, Canada, and Europe, and also to Singapore as there was flow to the Middle East in seventies. Kerala’s economy is propelled by remittances from the Middle East. India is one of the prize destinations of remittances. Conscious policy to encourage egress of job seekers beyond India should be designed.

Aging population in the advanced countries need care. In the modern unitary family system elderly people are looking for personalized care and comfort. This number is increasing throughout the world including India with every passing day. It will further increase with retirement of baby boomers. Skill to take care of elderly people will be in demand in future.

Disruptive educational policy introducing skills required outside India and based on innovations and outside the box thinking will have to be championed. It is disheartening although not surprising to read the UNESCO report which states that India would take another fifty years to reach sustainable development goals in education. This is a wakeup call. Nobel Prize winner Shultz in the early eighties had emphasized on investing on people through education and health as key to economic growth. Human resource development including gender equality is fundamental to long term prosperity of the nation.

Unless agriculture is predictable and rural economy is buoyant growth with jobs would be elusive. Over dependence on rain god is risky. Since large sized irrigation projects have become difficult due to land acquisition, rehabilitation and resettlement and environmental bottlenecks, government should encourage water harvesting structures, dry land farming and diversification of agriculture while establishing cold storages and warehousing and construct rural roads for access to urban and semi-urban market. This rural infrastructure will provide jobs. Agro-based industries need boost as they will augment employment in the rural area preventing migration to already overcrowded metros where life is totally and routinely disrupted with a good shower during Monsoon.

Although India can boast of the richest and wealthiest people figuring in the list produced by Forbes, it is also host to nearly 30% of people out of 1.2 billion who can be called poor and very poor. No government can have legitimacy with such a gargantuan inequality. To quote Michael Spence, the Nobel Laureate, globally secular stagnation can be broken only through redistributive tax structure which will effectively address rising inequality.

• [Mr Vivek Pattanayak is former Indian Administrative Services officer and director, International Civil Aviation Organisation]