Many years ago on my visit to China, I found most of the newspapers there giving a lot of attention in their front pages to decline in GDP, tapering of FDI into China and other such economic issues. In a blog post that visit, I rued that in India, our media doesn’t still focus on economic Roti, Rozgaar issues but spend disproportionate amount of columns on mundane political news and views. For the past few months, it has been good to see in India too, the media at last waking up to the slow down blues in the economy. For more than a year or so, the entire country was pre-occupied with the Modi re-election issue and everything else did not matter.
Since the re-election of Narendra Modi and his government that too with a majority better than last time, the euphoria and the resultant expectations have been very high. However, the party has been cut short by the bad news coming in on the economic front, day in and day out. There was a great opportunity for this Government with a new face as the Finance minister to have seized the opportunity when she presented the Union budget on the 5th of July and fire the economy. The budget was a decent one but one that was devoid of Out of box, bold ideas which would set the economy on fire. In doing away with the brown brief case and opting for the bahi kaatha, Nirmala Sitharaman’s budget was a ritual breaker but, was not a path breaker! Hence, ever since the budget, there has been quite a few negative reactions as manifested in the tanking of the markets, depreciation of the rupee and a massive FPI pull out!
The initial reaction of the Government to these reactions were in expected lines that our economy was still resilient, one of the fastest growing and hence no need to panic. However soon enough, with bad news emerging on the Automotive sector first and then even on FMCG, the Government was forced into action and from then on we have been seeing a slew of measures, cabinet decisions and sops to revive the economy. Q1 GDP at 5% turned out to be the last straw. Coinciding with the Q1 GDP results, the Government announced the merger of PSU Banks as a way forward in banking reforms. Economy was finally on top of the news cycle and the Government’s attention, Kashmir notwithstanding!
It was widely expected and hoped that some of the important initiatives of the Modi Sarkar in the 1st term like the thrust on Highways construction, massive investments in improving Railways infrastructure, improving air connectivity to the smaller towns, making electricity available to the last village and so on would start yielding results in terms of improving economic activity and fuel growth in the country. Added to this, Modi Sarkar has been constantly increasing outlays on MGNREGA in every budget. Why these measures have not started yielding results on the ground both in terms of economic growth and job creation is mysterious. It may be a good idea for the Chief Economic Advisor to come out with a White paper on the outcomes achieved for the massive outlays in Modi Sarkar 1.0.
In the back of all these, the question becomes, are the measures so far announced by the Government enough to resuscitate the economy? The reversal of some of the proposals in the budget are certainly welcome moves but those just contain the damage. And the other measures like opening up of FDI and so on are necessary but not sufficient to get us back to where we were last year (8%) and then hit our dream goal of 10% GDP growth which increasingly is becoming a pipedream.
During Modi Sarkar 1.0, the Government leveraged well on the windfall it had from the crude prices and not passing on the entire benefit to the consumer to “manage” the economy with heavy public investments. The hope was that gradually the private investments will pick up once the sentiments change. But unfortunately, due to the NPA and the overall banking crises, it did not fire up the economy so much but, just kept the wheels of the economy going. Now, under the current circumstances however, continuing of public expenditure alone may not be sufficient. The recent red herring on the increasing debt of NHAI may in fact become a dampener here. For India as a country, the next few months are supposed to be very high on economic activity with the impending festival season. And the fact that the monsoons have been bountiful for most parts of the country notwithstanding the floods in some parts, there is still hope even for this year.
So, in order for the economy to fire up, ways and means have to be found for increasing private investments and individual spending/consumption. I am no economist but here are some thoughts:
To get private corporate investments going:
- Modi Sarkar should bite the bullet and announce 100% FDI in Multi Brand Retail. Though India as a country missed the retail bus 10 years ago, it is still not late. Some of the global retail majors may not be as bullish today as they were a decade ago on India due to our policy flip flops and the current industry shift to E-Commerce. But still considering the country’s size and the potential it offers, India is still an exciting market for say specialised vertical retail stores. In announcing this, we should do away with the myriad sourcing conditions and allow the retail water to find its own level. Retail gives fillip to low end jobs, manufacturing industries as well as commercial real estate.
- Copy the STPI (Software Technology Parks of India) strategy that helped in boosting the software industry in India in the 90s and come up with a similar framework for boosting Electronic hardware manufacturing in India. This will help India in becoming a preferred country for those who are looking at alternatives to China. Again we are late in this game and today Vietnam has emerged as an alternative to China for low cost manufacturing. But still considering the long term view, I believe we still have opportunities here.
- Every Government recognises the potential of Tourism as an industry to provide jobs and improve economic growth. However, to unleash and unlock the true potential of India, we need massive capacity building in hotels, recreation facilities, connectivity and infrastructure. Government should provide time bound tax cuts for investments to private sector in this area to targeted locations in India which need infrastructural boost. The tax cuts must be linked to time bound completion of projects.
- As a purely short term stimulus, any capacity building in manufacturing industry by way of new factories, expansion of plants,.. should be provided with tax relief.
To improve consumption and spending:
- Holiday season is upon us. Provide relief on Income tax to individuals for money spent on holiday travel and stay in select locations in India which require boost on tourism (Uttaranchal, North East, Leh for example) with a cap of say Rs. 1 Lac. This will motivate public to take vacations and boost tourism in certain locations which have potential, decent infrastructure and connectivity but are untapped. Usually this has a spiral effect. When more people throng these places, automatically investments start pouring in for development. For every 3 years, the locations can be changed in order to make it widely spread.
- On the real estate front, today the supply is high and the demand low. This is mainly because the property rates are artificially pegged high and the home loans still high. This jinx needs to be broken. Though I have seen the Government announcing a slew of measures in the past few years, the housing market has not taken off. Considering the fact that the private real estate lobby is not going to cut prices ever, there is a need for the Government to intervene and disrupt the market. Like in countries like Singapore, Malaysia,.. Government must float either own companies or joint ventures to construct affordable housing in a massive scale and allot to citizens who do not own a single house in a transparent manner. The Government can offload its equity and then exit after say 20 years from these companies once the overarching objectives are reached. This will also disrupt the existing real estate industry and make it fall in line in terms of pricing and best practices, both of which are found wanting in the current scheme of things.
To revive the “animal spirits” in the Indian economy. Animal spirits are related to the points mentioned above i.e. both consumer and business confidence. I have put this separately as there are some low hanging fruits here which can be taken:
- Sell Air India as of day before yesterday!
- Get going on “Actual” disinvestment of Public Sector units already identified as non-strategic. Identify another Arun Shourie to make this happen in this term!
- It is not enough to merge PSU Banks but to offload equity, get professional management and turn them to “HDFC Banks”!
- Today many of the Government’s grand projects are stuck or going slow due to land acquisition issues. Identify the issues and fix them by bringing about the necessary changes in the Land bill!
- Use the current crisis of job loss to build consensus around Labour reforms. Adopt the “GST council” approach for labour reforms. Today all state governments will eagerly come on board considering the pressure all states have on generating jobs.
As I write this blog, I am seeing that the Finance Minister is addressing a press conference. This is her 3rd one in the last 2 weeks. Glad to see the Government demonstrating the needed sensitivity to the economic situation and willingness to take steps. Our only urge is that instead of incremental small steps, we need big leaps.
Only that will ensure we turn the tide over Gross Disappointing Product and achieve real Gross Domestic Product rates quickly!
Good & very detailed one Anand. Quite informative too for people like me who are short on knowledge & understanding in these areas
Is it fair to assume disruption to the business models, Upcoming Govt regulations / Guidelines etc could also play in the minds of consumers leading to delayed decision making on purchases ?
Finally does GDP really reflect the state of economy ?
Thanks Mukund for the feedback as always. Appreciate your taking the time to read and leave your thoughts.
Well, in the absence of any other alternative to measure the pulse of economy, one has to contend with “GDP”, isn’t it?
Well written piece RSA… Unlike many in the group, I don’t understand all these economic slowdown, dropping GDP numbers etc., These problems must have been there before also and likely to be there in future also.. I am just concerned about what is impacting my routine as a common man. There are lot of positives in the last 10+ years, to simply put unlimited data which was a dream once. Ola, Uber at a affordable price point when compared to looting of kaala peelas n autos, Good highways, e commerce, emergence of organized retails in a big way and you can add many. Are these natural progressions..?? May be yes.. But the benefits are there to enjoy..
Since we are a savings economy, we tend to save/invest in banks as deposits, real estate and/or gold (i am not considering the stock markets as the % of investing in stock markets are negligible when compared to overall numbers).. The problem comes when you are not sure of the returns on these conventional savings patterns… I strongly believe Demon played a big role in this.. Whether it is good or bad only time will say.. The current real estate situation impacts both the buyer n the seller which is kind of unique..
The suggestions mentioned by you are good ones, though not many are practical..
As far as automobile industry is concerned, I understand once in 10 years it tends to undergo this situation.. May be it is very obvious now as get to know everything fast thanks to unlimited data we get now a days..
That said, one thing for sure there is certainly uncertainty in the minds of common people which can affect spending pattern and not good for the country..
These are simple common man’s views..
Keep writing more mate 👍
Thanks MSP for your candid feedback! The current dip could be cyclical but I feel that this is more structural borne out of cleaning of the banking system and the lending economy. As we have seen in the past, a crisis always leads to far reaching changes in India. So may be we will get to see some impactful changes in the lending economy as well. WIth the upcoming festive season in India, certainly the next 2 Qtrs will be better and that will give a temporary reprieve to the economy.
The economic policies of the BJP were in doldrums right from the day Jaitley became the FM.
He first fleeced the middle and low class people black and blue with his Demon and high tax policies and next ruined the manufacturing sector and consequently the entire business and trading sectors with the highest GST slabs that even a worst case scenario needn’t warrant! It should’ve been initiated at the lowest level to first test the business waters before taking it forward to the next deeper level. Thus what could have been a very pleasant ‘one nation one tax’ business regime for the economy turned out to be a crude joke on it! I don’t know if the curse he ‘d incurred has any poetic justice with …..you know what!
Whatever it is, with a friend like Jaitley as FM, the BJP hardly needed an enemy at the hustings earlier this year. Precisely when the BJP seemed buried under its own debris of economic terrorism which albeit filled a robust govt coffers, an ill-gotten wealth, came Balakot to save Modi. A political panacea for an economic harakiri.
He was easily India’s worst FM, beating his nearest rival who is now choosing between CBI suite and the Tihar to cool his heels. His Demon might have a tad frozen the black money but failed to realize it in real terms for the economy; nor did his GST assuage the ruffled feathers of an economy.
Then there are the other white elephants like NPA, MNREGA, etc created by the UPA and piously continued by Modi. And the latest eureka – the Mudra yojana, another source of NPA in the offing, though with less potency. Mudra yojana is a novel catch 22 factor, BJP’s own invention – either you give it and perish with the high risk of accumulating your NPA or deny it to fully strangle the small and the medium-level entrepreneurs who are already gasping for breath! In any case, growth of GDP without creation of jobs remains an inheritance in the past two decades.
As manufacturing sector has been hit hard, we are groping in the dark on how to abridge – and benefit from – the growing trade gap between the US and China.
As for suggestions given by you, Anantakumar, under the existing FDI regime, 100% FDI is allowed under the automatic route for the manufacturing sector, where a manufacturer is permitted to sell its products manufactured in India through wholesale or retail, including through e-commerce. However, considering the lack of clarity on outsourcing of manufacturing activities — that is, contract manufacturing — a provision for contract manufacturing has been introduced.
With a view to further stimulating domestic manufacturing as part of ‘Make in India’ initiative, 100 per cent FDI under automatic route has been allowed in contract manufacturing, to bring it on par with the existing FDI regime. Hence, manufacturing activities now may be conducted by the investee entities themselves, or through contract manufacturing under a lawful contract, either on principal-to-principal or principalto-agent basis.
Under the extant FDI regime, 100% FDI is permitted — that is, up to 49% under the automatic route and beyond that under the approval route. There is an additional requirement of procuring 30% of the value of goods from India as part of the local sourcing norms where an SBRT entity has FDI of 51% or more. But the fruition period is too long for immediate comfort.
The way is too long ahead to address the urgent issue of lifting the GDP from the abyss it has reached now.
As regards housing, PMAY is already benefiting the rural and urban poor, but its higher level success is predicated upon the factor that the govt should leave adequate money in the pockets of the middle and the poor classes, which the govt has to look into.
I pity Nirmala Sitaraman’s unenviable position inasmuch as she’s new to the job and both her predecessors have left her a precarious legacy of jobless growth in the past two decades. I’m afraid what the accident victim really needs now – a medicine or a post mortem.
Thanks Ganesh for the detailed feedback. I though feel that GST is a mush needed reform. On etax rate is ideal but in chasing that the Govt would have never got to implement GST. Because they were flexible, GST took off and govt knew this well when they launched it. Having said that, simplicity is the key. If we can move to a more grossing GST return system without matching invoice by invoice like it is in many countries, life will be simpler. But then, as a country we always look for loop holes to exploit in any system!
The economic policies of the BJP were in doldrums right from the day Jaitley became the FM.
He first fleeced the middle and low class people black and blue with his Demon and high tax policies and next ruined the manufacturing sector and consequently the entire business and trading sectors with the highest GST slabs that even a worst case scenario needn’t warrant! It should’ve been initiated at the lowest level to first test the business waters before taking it forward to the next deeper level. Thus what could have been a very pleasant ‘one nation one tax’ business regime for the economy turned out to be a crude joke on it! I don’t know if the curse he ‘d incurred has any poetic justice with …..you know what!
Whatever it is, with a friend like Jaitley as FM, the BJP hardly needed an enemy at the hustings earlier this year. Precisely when the BJP seemed buried under its own debris of economic terrorism which albeit filled a robust govt coffers, an ill-gotten wealth, came Balakot to save Modi. A political panacea for an economic harakiri.
He was easily India’s worst FM, beating his nearest rival who is now choosing between CBI suite and the Tihar to cool his heels. His Demon might have a tad frozen the black money but failed to realize it in real terms for the economy; nor did his GST assuage the ruffled feathers of an economy.
Then there are the other white elephants like NPA, MNREGA, etc created by the UPA and piously continued by Modi. And the latest eureka – the Mudra yojana, another source of NPA in the offing, though with less potency. Mudra yojana is a novel catch 22 factor, BJP’s own invention – either you give it and perish with the high risk of accumulating your NPA or deny it to fully strangle the small and the medium-level entrepreneurs who are already gasping for breath! In any case, growth of GDP without creation of jobs remains an inheritance in the past two decades.
As manufacturing sector has been hit hard, we are groping in the dark on how to abridge – and benefit from – the growing trade gap between the US and China.
As for suggestions given by you, Anandkumar, under the existing FDI regime, 100% FDI is allowed under the automatic route for the manufacturing sector, where a manufacturer is permitted to sell its products manufactured in India through wholesale or retail, including through e-commerce. However, considering the lack of clarity on outsourcing of manufacturing activities — that is, contract manufacturing — a provision for contract manufacturing has been introduced.
With a view to further stimulating domestic manufacturing as part of ‘Make in India’ initiative, 100 per cent FDI under automatic route has been allowed in contract manufacturing, to bring it on par with the existing FDI regime. Hence, manufacturing activities now may be conducted by the investee entities themselves, or through contract manufacturing under a lawful contract, either on principal-to-principal or principalto-agent basis.
Under the extant FDI regime, 100% FDI is permitted — that is, up to 49% under the automatic route and beyond that under the approval route. There is an additional requirement of procuring 30% of the value of goods from India as part of the local sourcing norms where an SBRT entity has FDI of 51% or more. But the fruition period is too long for immediate comfort.
The way is too long ahead to address the urgent issue of lifting the GDP from the abyss it has reached now.
As regards housing, PMAY is already benefiting the rural and urban poor, but its higher level success is predicated upon the factor that the govt should leave adequate money in the pockets of the middle and the poor classes, which the govt has to look into.
I pity Nirmala Sitaraman’s unenviable position inasmuch as she’s new to the job and both her predecessors have left her a precarious legacy of jobless growth in the past two decades. I’m afraid what the accident victim really needs now – a medicine or a post mortem.
I am still trying to fathom the depth of the rot in our economy. Is it a sign of prevailing ills in our economy or a global slow down as predicted by the doomsday economists?
insightful.co.in
My view is – tightening of the money market is at the centre of the current slow down in India. If you see businesses which have access to cheap capital ( ECom for ex) will go unaffected by this. But businesses that depend on local capital from Banks and local institutions will be affected ( Automobiles, Capital goods,..) But I think this was a long pending correction.
The Govt along with the banks need to come up with a plan to declog the balance sheets of the banks of the NPAs quickly after which things can get into normal.
Ok great, but as per banks, there is no liquidity crunch. Banks are flushed with funds. Surely this government has cleaned the balance sheets of many banks and gotten rid of NPAs, which on the surface gives the impression of ill health if the banks.
You are right. Banks are flush with liquidity. But they can’t lend. Either the seekers are past defaulters or not credible enough.
Thats why I said, there needs to be massive loan re-structuring program and clean up loans and start afresh.
This subject is an extremely complex one. Sitting from outside there could be a million options but what I feel is that with the way our bureaucracy works along with other political view points implementing anything in India is by itself a great challenge. I really appreciate the way Modi has tried and made a lot of changes in core areas, not sure how far they have succeeded but tough decisions were made.
One realisation for me is there is a huge difference in how the economic situation affects urban people and rural people. Issues like real estate, technology, GDP, tax rates, bank interest, automobile sales drop etc have no impact on rural class of population. Most dint have any if these priviledges and needs also.
One major reform needed is labor laws in the country. Even now it’s so tough for someone to start a business and give employment. ESI, PF, PT etc etc which is not a bad idea but the way to execute these are so difficult.
As far as India becoming a cheap place for manufacturing I feel this should never happen as cheap products don’t have a long need rather we should become like Germany where we can develop and manufacture high class products at affordable price for the world.
Environmental challenges need immediate attention. October 2nd we will possibly hear more on this. Already am seeing many FMCG companies shaking as any positive step towards environment will mean difficulty in packaging of several products. Mineral water industry will be hit in a big way, but so be it. Nothing must come on the way if environment in India from now.
As a business man I am feeling the pinch from all directions. But when I think how tough it’s to manage a small organisation I only understand how tough it will be to manage the economy of a great nation like India.
Thanks Dilip for taking the time to read and leaving your detailed thoughts. I agree with you that most issues around economy don’t mean anything to the common man in rural India. But I do feel that there is room to make things simple in India in the way we do business (as you have rightly said) and Govt to exit many of the non core businesses they are in (which sucks up Tax payer’s money). These will signal positively!
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