If the revival package doesn’t work, high stock market valuations cannot be sustained
The next phase of lockdown will be crucial for economic revival since it involves easing restrictions for business, ideally without triggering more infections. The relief package, stated to be Rs 20 trillion (roughly 10 per cent of GDP), needs to be carefully examined for details. It includes many previously announced components and the actual increase in outlay and cash outgo may amount to about 1.5 per cent of GDP. The old Swadeshi slogans have been repackaged and trotted out as well.
Some elements of the package such as opening up coal, privatising airports, allowing private enterprise and higher FDI in defence, space and eliminating the APMC and others, might be good for the economy in the long run. But some of these have been discussed for years with little actual progress on the ground. These are also long-gestation projects if they do occur.
When it comes to manufacturing, India’s competitiveness has always been crippled by many factors. One issue is a confusing laundry list of labour laws. Other retarding factors include difficulty of obtaining land, scarcity of capital, and mountains of red tape.
Scarcity of capital will be less of a problem if the government is serious about offering easy money to micro, small and medium enterprises (MSMEs). Real estate prices have collapsed, making it easier to acquire land. This is also a good time for labour law reform. Some labour laws are necessary however, and there is a chance that those will be chucked out along with the unnecessary ones if the UP model is adopted. People desperate for work may endure low wages and inhuman conditions. But if reforms aren’t seen as equitable, there will be labour unrest.
The go-local campaign will have poor outcomes if it isn’t backed up by meaningful reform. Our history includes a long phase, 1955-1992, when imports were blocked by non-tariff barriers and absurdly high customs duties. It’s no accident there was very low growth.
India cannot afford to be uncompetitive globally or isolationist. There is an unavoidable, import bill due to energy deficiency and India is also deficient in rare earths, which are essential for renewables equipment. Global competitiveness is needed to ensure exports earn enough to cover imports.
Nobody buys Chinese, Vietnamese, Korean or Bangladeshi goods due to love for those nations. These nations have grabbed market share by offering higher quality at lower prices. If India Inc is protected, competitiveness will further reduce, meaning larger trade deficits, larger current account deficits and more pressure on the rupee.
A reversion to the 1955-92 “strategy” of high import duties and non-tariff barriers will lead to consumers being forced to buy inferior goods at higher prices. It will encourage smuggling and incentivise corruption.
The stock market will be happy at the prospect of liquidity and local businesses being protected and allowed higher margins. But the real economy will not be happy and growth will not revive since households forced to spend more on shoddy stuff also have less surplus to invest.
Thus, a push to go local depends heavily on sensible, fast-tracked reforms. This is vital if India is to survive a difficult period in terms of global trade. The six-year track record and the package offers little sign that this will happen.
Most financial advisories are reviewing the April-May period and assuming GDP will nosedive by double figures in this quarter. Nomura has downgraded fiscal 2020-21 GDP growth estimates to minus 5 per cent. Some other estimates for the fiscal are in the double-digit minus range.
Net-Net, the rescue package was necessary. The government must boost consumption demand. The package should have been larger in actual terms and probably structured differently to put more money in lower income hands.
Consumption is in the ICU with roughly 25 per cent of workforce unemployed. The Reserve Bank of India is pushing up money supply as it must, to encourage consumption. But this is also a point of time when the supply of goods and services is limited. More money in circulation and fewer goods, will mean price volatility with sharp swings between inflation and deflation, until re-employment occurs and supply increases in stable fashion.
The next six months will be very tense. The pandemic hasn’t eased off much. Sometime this week, India will cross into the lakh-plus zone in terms of known cases. If the revival package doesn’t work, high stock market valuations cannot be sustained.