On A Slippery Slope
As a new government takes charge, the fastest growing large economy globally seems to be headed for a slowdown. The signs are all there. There is rural and farmer distress; the fiscal noose is tightening; tax collections are well short of target; automobile sales are down to a seven-year low; credit offtake is low; and consumption too is slowing. Trade is also moving is the slow lane.
These are some of the challenges that the new government has to handle. To discuss this, Business Today organised a roundtable. The participants included Ajit Ranade, President and Chief Economist, Aditya Birla Group; Shweta Saini, Senior Consultant, ICRIER; Sachidanand Shukla, Chief Economist, Mahindra & Mahindra; D.K. Joshi, Chief Economist, Crisil; Devendra Pant, Chief Economist and Head-Public Finance, India Ratings; and Biswajit Dhar, Professor of Economics, JNU. The discussion was moderated by Prosenjit Datta, Editor, Business Today. Edited excerpts:
Prosenjit Datta: The government is going to inherit an economy with problems - a tight fiscal position, severe rural and farmer distress and lower-than-target tax collections. Commentators have said we are heading towards the middle income trap, and the most worrisome thing is that the two things that pushed up economic growth, government spending and consumption, are coming down, if reports are true.
Ajit Ranade: The immediate concern is rainfall. We are looking at a situation where at least 42 per cent of the area is under drought, although that will change in the coming months. There is concern about how severe the drought will be.
Shweta Saini: Our calculations say that never in the past 100 years have we had five consecutive years of negative long period average deviation of monsoon, as we have had now. This will be the sixth year running. So, we are looking at not just a drought year, but something that has accumulated over years. Another big crisis that we are looking at is on the market side where they had anticipated that increasing MSPs (minimum support prices) and running the PM-AASHA (the Pradhan Mantri Annadata Aay Sanrakshan Abhiyan) would curtail the crisis.
Sachidanand Shukla: There are challenges every single year, every single cycle. If you continue to approach problems with the same old mindset, you will run out of policy options and responses. We are geared to thinking of ourselves as a supply constrained economy but are facing what typical developed economies have been facing. Sector after sector, we are witnessing demand challenges. A policy response is needed. Look at production versus demand. We need a paradigm shift in our response function.
D.K. Joshi: In terms of global issues, trade is a major factor. We are moving from open to closed economies. The second aspect is the kind of monetary policy responses from advanced countries. Recently, the European Central Bank said that one takes small steps in a dark room. We are in a benign scenario because at least they are not tightening policy and that has led to capital flows back into India. A lot will depend on how lucky or unlucky we are this year, in oil and monsoons. If oil prices shoot up, we are in trouble. If monsoons are bad, we are in trouble. If you get these two things right, then you can easily sail out of this situation because low oil prices have fiscal, inflationary and growth implications.
Devendra Pant: We have overlooked the sharp decline in household savings. Households are the only sector that has a positive saving-investment gap. Unfortunately, in 2017/18, household savings were lower than even government demand. Until and unless household savings improve, we are not going to see a decline in interest rates. For interest rates to come down, structurally, or in a medium to long run, the savings rate has to go up. So, we have to look at how household savings are going to behave or if we can give it a boost.
Biswajit Dhar: We have some serious challenges and I don't think we can stand up to international competition. In agriculture, we are in a bind. We can't decrease tariffs because inefficiencies are spilling over and because of the demand factor, we are facing in a deflationary situation. There is no incentive because we have been surviving on the domestic economy. We had no ambitions of going into the international arena. For India to be part of the global economy and not withdraw is going to be the major challenge.
Datta: What can be the government's agenda in the first 100 days, or in the medium and longer term? Let's start with agriculture...
Ranade: If there is a severely deficient monsoon, we will have to consider the scale of MGNREGA. When it was first enacted, it was supposed to focus on 200 most backward districts. Then it got expanded. We should go back to the targeted approach and focus on the financially vulnerable districts. One specific area we can look at in the first 100 days is farmer producer organisations (FPOs). There are multiple tax issues.
Saini: Every time we had deficit rains, foodgrain production fell, 2015/16 being a recent case. Even though numbers showed that production went up, we imported 5.6 million tonnes of wheat. We have to look at sustaining that surplus. There are surpluses, but will they continue in the future? There are large grain stocks in FCI godowns and large pulses stocks with NAFED. They have dedicated resources in the budget to offload it through PDS, but these numbers are unprecedented. We need a strategy to ensure grains are offloaded in time. The over-reliance on MSP for ensuring prices has to be subdued. They have to look at FPOs.
In the first 100 days, NREGA is important. I see NREGA's role as very important in micro irrigation and water management. We can create water storages at micro levels in fields in anticipation of dry spells. Next, unproductive cattle will be a top concern in the coming few months, as it breaks the economic cycle of a dairy farmer. There is an urgent need for an answer to what they wish to do with unproductive cattle. Can we visualise a situation where there are no cows and everybody only buys buffaloes?
Shukla: The best way to not solve agriculture problems is to start with a 100-day agenda. This is a 100-year-old issue. Look at the real GVA or GDP growth in agriculture. Look at food output, horticultural output or non-food output. It has been 4-7 per cent, right? But incomes have not grown. In the past four or five years, the average WPI would be close to 1 per cent. In the past two years, hardly 1 per cent. If agricultural GVA in nominal terms had the same level of inflation that we had three years back, agri GVA would be close to Rs 37 lakh crore. But because inflation has fallen, GVA is about Rs 28.5 lakh crore. This means farmers have lost an equivalent of around Rs 8 lakh crore worth of income.
Politicians have been smart at understanding this. They have announced farm loan waivers worth Rs 2 lakh crore. So, against a notional loss of Rs 8-9 lakh crore, you have given or promised Rs 2 lakh crore worth of farm loan waivers. The point is that you need to undo that loss.
Shukla: We need a big liberalisation drive in agriculture. We need to free these markets from the clutches of the government. In any market, the basic thing is price. But if you are the person who is going to procure the most through MSP, and you only are going to set prices, that is the surest way of harming that sector. The government has to get out of the sector. We have been talking about APMC for the past 20 years. Some states have done things, but it is time that we focus holistically on agriculture.
Joshi: I am not sure whether we are in a complete oversupply situation. Between 2000 and 2006, food inflation was below 2 per cent, and overall inflation was 3.9 per cent - the current target - and farmers were not suffering. Input costs have risen much more sharply while output has remained the same. And, whatever be the output price, the margins of middlemen don't change. It's the farmer who gets a short shrift.
Saini: In Maharashtra, fruits and vegetables were outside APMC, but traders wanted to sell in the APMC market yard because intermediaries delivered services. For example, access to credit, which you otherwise don't get from institutional credit. These are the people who assure purchase of the quantity you bring and access to credit. Second, results from the ICRIER-OECD work show that on an average, from 2000 to 2016/17, farmers suffered net losses on output prices also because of lower realisation in recent years.
Every time prices go up, they announce MEP (minimum export price), export bans or restrictions. So, farmers are not able to get prices they would have realised from international markets. On an average, in 16 years, farmers received about 14.5 per cent lower gross farm receipts, amounting to a loss of Rs 45 lakh crore, and not just Rs 8 lakh crore.
Pant: I would be very afraid to suggest any short-term solution to agriculture. It is like giving Brufen to a patient suffering from cancer for temporary relief. And in the process, we tend to overlook the long-term solutions. We don't need a situation where food prices are growing at 10 per cent and we don't need a situation where food inflation is negative or growing at 0.8 per cent. We need somewhere in between. Unfortunately, the entire monetary policy is so fixated on headline inflation. If headline inflation is coming down because of deflation in food prices, we must take some action.
Datta: What is the long-term solution, or at least, what is the solution that can be moved forward for five years?
Dhar: Unfortunately, that will get into the problem of Centre and states because most things fall in the state' domain, like the APMC Act.
Shukla: There are some pieces - horticulture, for example - where we are doing fine. There are some crops where we need to raise yields, but at the same time, we have enough success stories within agriculture. Get more involvement from the corporate sector, let them bring in new technology, and let the government focus only on regulation. Crop insurance began to work but failed because questions were raised in Parliament about companies profiteering. Get corporates involved by getting the market at the doorstep of the farmer. As long as you have MSPs, you will continue to distort markets.
Datta: Apart from agriculture, private investment and consumption are also down.
Ranade: There is a concern on why private investment spending has stagnated or declined as a percentage of total investment for several years now. Overall investment spending and its proportion in GDP have also declined. The problem is more severe if I could aggregate the investment.
Datta: This NDA government did not manage to create a new industrial policy.
Pant: A draft has been hanging around. Investment and consumption are related to each other. We are looking at a situation where IIP growth is coming down and capacity is going up. This gives an impression that some of the existing capacities have gone out of the system.
From FY12 to FY18, contribution of households to investment and gross fixed capital formation was highest, even higher than private corporates. And this is the sector where both savings and investments are falling. The household savings rate has fallen to around 17.5 per cent from 22-23 per cent. This is the sector where investments are falling. Growth of bank credit to MSMEs is falling. In the last few years, it was negative. In terms of GDP, it is two percentage points less than what it used to be in 2014/15. Until issues related to this sector are addressed, it will be difficult to have sustained improvement in investment and consumption.
Joshi: There is no doubt capacity utilisation has improved. Corporates don't have to wait for capacity use to hit 80 per cent and then start investing. Many corporates are sitting on cash right now. They are in a position to leverage. So, when there is an opportunity, private investment will go up.
According to the latest RBI survey, consumer sentiment is going up sharply and business sentiment is down. Some sectors still have excess capacity, because in 2010/11, they created a lot of capacity expecting 8 per cent growth, but growth actually fell. Bankruptcy proceedings also free up spare capacity. That's happening in steel.
Datta: The Business Today-C fore Business Confidence Survey actually showed this to be slightly lower. The last round was lower than what it was before we went for elections in 2014.
Shukla: The entire focus in India is on cost of capital but availability of capital is an issue. People who need capital don't readily get it. In private capex, think of the linkage of India's economy with the rest of the world. We are linked to the global cost of capital much more than before. Profitability is squeezed, it is not growing. Look at retail, realty, banking, telecom and IT. These are the poster boys of economic growth in India.
Dhar: We have not been able to attract foreign investment. We are fond of comparing ourselves with China. Despite slowing down, China is growing. And Hong Kong is being leveraged even more now. China and Hong Kong are getting about $260 billion foreign investment and the US is getting $275 billion, while we are languishing at $33-38 billion. Something has gone wrong drastically. Indian investors are not interested. Our outflows have increased. The finance minister was happy that India has become an investor abroad. We should be unhappy because our country needs investments.
In auto, two-wheeler sales have come down. And jobs are not being created. The problem is that we have a demand constant economy and if we don't do anything about demand, we won't get profits. If we don't have the market, no one is going to get interested.
We are saying that manufacturing is not competitive, and every sector is asking for more tariffs. This is a big issue. So how can we stop this finger pointing: the government saying that the industry doesn't tell me what it wants, and industry saying that the government doesn't listen?
Shukla: Industry hasn't thought beyond the domestic market. When I analysed three major FTAs (free trade agreements) that we entered into, trade deficits have gone beyond our control. We are not exporting to them but imports have gone up. In IT/ITeS, we have got stuck at the low value-added level. We don't seem to realise that when Industry 4.0 kicks in, many of these call centres will be out of business. We will always be a country with huge potential in everything. We have to find industry-specific solutions and then take it forward.
Saini: We are a food insecure country and are concerned about rising domestic prices, but unless policy assures a stable and predictable environment, backward investments don't happen. We need predictability in policy. There is a need to identify areas that can specialise in production and then create a value chain - domestic and international - connecting them to the markets. In Orissa, the entire agriculture export is marine. There is Paradip port, but no marine exports go from Paradip; everything goes from Vizag.
Joshi: Manufacturing is a tough nut to crack and its share in GDP doesn't seem to rise. There is opportunity because people want to move production bases out of China. But think of all the problems one faces when setting up a factory, and then compare it with competitors. Labour inflexibility and shortage of power comes into play. Once you produce, you need to ship it to ports. That's where logistics comes in. Split into these components and compare with competitors. How can you export if you don't fix these? In the last decade, Vietnam's share in garment exports has risen from 1.7 per cent to 5.3 per cent and Bangladesh from 2.5 to 6.7 per cent. India's share rose only 0.8 per cent.
Datta: Was it because of neglect as industry grew or was it because of regulations?
Shukla: The government has been helpful in the auto sector. It's not been excessively regulatory and therefore it's not a constraint. Acquisition of land is a real constraint and labour laws are an issue.
Dhar: Pharma has become a sunset industry. Tomorrow even formulations will be imported from China. Twenty years back, we were exporting bulk drugs; today, we are at the threshold of importing formulations. Forget about growth; it's actually retrogression.
Pant: I am not going to the 2017/18 data. But if you look at the latest data that is acceptable (2011/12), 51 per cent of the labour force is self-employed. Technology has been a great disrupter in the production process also. Even in construction, which has the highest employment elasticity, gone are the days when people used to make roads using shovels. So employment growth is likely to be lesser and lesser. There are still certain sectors where employment elasticity is higher than in others. For example, the textile sector. People are talking about IIP growth being at a 21-month low on a quarterly basis.
Access to credit or credit growth to such sectors is declining. Some 36-odd per cent are casual workers and the remaining are salaried or have fixed kinds of jobs. We are looking at a situation where 81 per cent jobs that were there in 2011/12 are not growing. We have to grow much faster so that we are able to take care of those people who are coming in the job market with 'adverse' conditions. Artificial intelligence and block chain technology are going to be big disruptors for employment generation.
Dhar: We've gone horribly wrong because the goalpost is growth. The goalpost has to be employment, and we can work backwards from that and identify the sectors such as industry or agriculture, and what the government can do. The reality is that public investment actually drives private investment. Even in the US, there's a huge amount of federal funding going into basic research. Industry then takes over.
Industry will have to point out to the government that these sectors are job creators. I could never understand how textiles and clothing, which have huge employment potential, could be treated as sunset sectors. A number of research reports have been written about Tirupur and Jalandhar. I did two studies for ITC on Brandi and Pochampally. The industry needs to bang at the door and say this is what I want.
Shukla: We have enough macroeconomics. We need to pay enough attention to micro ingredients. Can GST be a big driver of job growth? The whole idea was that it is a generational reform to unify markets. If you formalise, there are gains to be made. But execution is important. Smart cities, for example, haven't taken off simply because there is no brief. We are going through a great churn. We are trying to formalise the economy, and by definition, you will be shedding jobs as long as this process is not complete. Be it demonetisation, GST, RERA (Real Estate (Regulation and Development) Act) or IBC (Insolvency and Bankruptcy Code), when you formalise an informal system or an economy, you will be shedding jobs for a period of time.
Apart from that, there is confidence or sentiment. We must understand that employment elasticity has gone down. In the 90s or early 2000s, it used to be 0.4 for every percentage point in GDP, now it is roughly 0.2. There's a World Bank report that says that with every percentage point (of GDP growth) you will add about 75 million jobs. So, even at 10 per cent growth, you will not be able to absorb the 10-12 million numbers that they keep talking about.
If we are able to get inflation in a narrow band, it will impart stability. Rupee volatility and interest rate volatility will come down dramatically. So the cost of funds will go down over a period of time. If you implement IBC correctly, cost of funds will come down structurally, and you will be able to bring down the rate of interest. Steps like GST and IBC can be big drivers, as they will free up entrepreneurial capital, time and money.
