This is the last full calendar year for the present government, and it has not begun well with the growth forecast for the current fiscal year being reduced to a four-year low of 6.5 per cent. In a way this is not surprising. The share of investment in GDP has been falling year after year — from 34 per cent in 2012-13 to 29 per cent last year. And, you need to invest today to facilitate tomorrow’s growth. One wonders whether two macroeconomic policy decisions of the present government, which came to power in 2014, are responsible for at least a part of this fall in investment and growth, and in the growth of non-performing assets (NPAs) of the banking system: • Inflation targeting for the central bank, with growth not getting enough emphasis in monetary policy decisions; • Fiscal deficit reduction to limit the public debt to nominal GDP (and please the rating companies?). Most empirical research suggests that a ratio of even 90 per cent is safe — ours is around 60 per cent. Most economists have lauded both. But if the government’s objectives are “sabkasaath, sabkavikas” and “Make in India”, the slogans on which the party in power won the last election, then are these the right policies if the economy is to create jobs for a million people entering the job market each month (net of retirees and people working at home)? And, a significant proportion may need to come from the manufacturing sector: in 2016-17, the sector added just 400,000. According to Centre for Monitoring Indian Economy (CMIE) estimates, employment grew by just 2 million in 2017 — and our labour participation rate is now just about 44 per cent against a global average of 63 per cent and China’s 71 per cent. In a pre-Budget meeting with the Finance Minister, some economists urged him to increase the social security payments and coverage. Others emphasised the need to stick to the fiscal deficit and government debt targets recommended by a review committee recently. As for the first, one has no quarrel.
As it is, our income inequality is one of the highest amongst the large economies, exceeding that in the US. According to the World Inequality Report, 2017, the top 10 per cent in India now account for more than 55 per cent of the national income; the top 1 per cent earn more than the bottom 50 per cent. The inequality has been growing for the last 35 years. This could well lead to social instability. As Rajiv Kumar, vice-chairman, Niti Aayog, recently argued we need to “generate good quality employment which will come from organised retail, exports and tourism”. It is worth recalling • that, in our case, manufacturing as a percentage of GDP is practically unchanged since the reforms of the early 1990s; • that every fast growing Asian economy has done so through rapid growth in manufacturing for export markets. He also emphasised the need to zero-ise the revenue deficit, not the fiscal deficit. Indeed, we need to increase investments, particularly in infrastructure, which may well lead to higher fiscal deficits and public debt; and also an exchange rate policy to support export growth and domestic industry competing with imports, a point I will come back to in a later article. As for investments, not all projects are susceptible to bank financing. In fact, project finance is not a viable proposition for bank/institutional finance: we have tried this long enough – from IDBI and ICICI a few decades back, and IDFC more recently, all became commercial banks. Even today, one important reason for the larger NPAs of public sector banks (as compared to their private sector counterparts) is the exposure to project finance and sectors like steel which compete with imports. The solution to my mind is devoting larger public funds to investments, not self-imposed fiscal and debt limits. No wonder, in a recent interview Dr Bimal Jalan criticised the “fixation” with fiscal deficits. The other mechanism being increasingly used is to borrow in the name of supposedly “autonomous” entities like the National Highways Authority of India. Even if there is no formal government guarantee, surely these are contingent liabilities of the government of India? Perhaps the strangest example of “creative accounting” is the proposed recapitalisation of banks. It seems that the bulk of this will be financed by issuance of non-tradable, non-SLR bonds to the banks being re-capitalised. Apparently, this will be a “below-the-line” entry, not affecting the fiscal deficit. Before imposing fiscal deficit limits what we need is a “true and fair” accounting of the government’s assets and liabilities, actual and contingent. In the absence of such accounting, limits on fiscal deficits are a meaningless exercise — it will only slow down growth and job creation.
The author is chairman, A V Rajwade & Co Pvt Ltd; firstname.lastname@example.org