Amidst expectations of a stimulus package to boost India’s flagging growth prospects, Prime Minister Narendra Modi has set up an economic advisory council. What sort of advice is he looking forward to from the council headed by Bibek Debroy? With two-thirds of the NDA’s term already over, the government will be increasingly in an election mode. With major state elections ahead as in Gujarat later this year and 2018, followed by the national elections in 2019, there are strong political economy compulsions to loosen the purse strings to win at the hustings than listen to technocratic economic advice.
With opportunistic electoral-cycle behaviour likely from now onwards, the constitution of the PMEAC thus appears to be a tad too late. No doubt, its constitution has been motivated by the sharp downswing in growth. If this problem is perceived to be merely a quarterly “blip” then the council can be tasked with recommending stimulus measures, including shovel-ready projects, to boost short-term growth. But if the decline is considered more structural in nature, a road map of reforms will have to be drawn up for the PM’s consideration.
It is a no-brainer that this council is only as important as the PM wants it to be. Former PM Manmohan Singh, for instance, gave a lot of importance to his council headed by C Rangarajan. The then PMEAC regularly prepared reports on the state of the Indian economy and the measures necessary for addressing various problems. How much of the council’s recommendations translated into policy implementation is a different matter altogether. With state and national polls now on his mind, whether PM Modi would similarly heed and act on his council’s policy inputs is the big question.
No doubt, the new PMEAC’s major challenge is to address India’s free-falling growth. In response to the global economic crisis of 2008-09, the then UPA government sought to boost demand for industrial goods across-the-board by lowering the Cenvat duties by 4%. It announced expenditures of Rs 34,000 crore or 0.6% of GDP at market prices when the real need was for five times that amount to add one percentage point of growth. The Rs 50,000 crore or 0.3% of GDP being currently talked about is equally inadequate as the resources required are 11.5 times more to increase GDP growth by one percentage point.
Where are these resources to come from? Not from domestic investors. They are debt-ridden and are postponing their investments. Due to these uncertain times, the big corporate houses are battening down the hatches, reducing costs and laying off staff. At a time when India Inc is going slow on capex, there is certainly scope for more aggressive lowering of interest rates and ensuring that banks lend more to the demonetisation and GST-hit small and medium businesses. However, the only problem is that this is really the remit of the RBI and the Monetary Policy Committee than the PMEAC.
If there is to be a fiscal stimulus, it must definitely be imparted by budgetary resources. This is the time to ambitiously step up public investment, even with market borrowings if necessary, for revitalising the national highways programme, railway track renewal and modernisation and port expansion. This is certainly the occasion to address the crisis-ridden state of the agricultural sector by building more rural roads and irrigation systems to insulate it from the vagaries of the monsoon. Here again, this is more for the finance ministry to address in the next budget. With elections looming ahead, the additionality the PM’s new council brings to the table therefore deserves watching.
N Chandra Mohan is an economics and business commentator
The views expressed are personal