Among the many insights into human behaviour is the concept of intuitive or “gut” decision-making. Professor Daniel Kahneman, who won the Nobel Prize in 2002 for his pioneering work in behavioural economics, showed that when confronted with limited time, most people will go by what their “gut” says. A police officer, for instance, while chasing an armed criminal will most likely make a split-second decision based on training and prior experiences.
What is true of individuals is also true of nations. In a nation’s history, a year is just a speck in the continuum of time. Yet, 2015 may be just the time for intuitive or “gut” decision-making by India, particularly to repair the economy to help regain its status as an engine of global growth.
Gradualism is passé, big bang is in
The biggest threat to a new government is sometimes the unrealistic expectations that come bundled with a landslide victory. In the case of the Narendra Modi-led NDA government, these expectations are based on a few assumptions. First, there is a dominant argument that the economy was in the boondocks because the previous UPA government attached greater premium to political risk-management than reforms. Second, Mr Modi led a high-octane “Achhe din aane wale hain” poll campaign promising to usher in good days. Third, and more importantly, the current government enjoys a majority in the Lok Sabha that should ensure smoother passage of key legislation in Parliament.
Over the last six months, the government has demonstrated its intent to walk the talk on its poll pledges. It has promised to turn India into a manufacturing powerhouse through the Make in India initiative by removing bureaucratic sloth and ironing out procedural irritants that are often cited for holding back investments.
It has also been a pleasant sight to spot a flurry of reformist intent, if not downright action. Fuel prices have been decontrolled; foreign investment norms in insurance have been eased; disinvestment is on track with the promise of more floating shares on our stock exchanges; a new coal allocation policy is being firmed up; and the Centre is in the last stage of discussions with states for a unified goods and services tax. If indeed an opportunity is presenting itself, the government has shown its willingness to exploit it prudently.
It is sometimes helpful to carve up the economy into two slices—the real and the financial sectors. The trends in the latter, quite often, tell us what to expect in the former. Few events capture this correlation of ‘sentiment’ as dramatically as movements in equity markets. If the BSE Sensex is looking set to vault past the peak of 30,000 a few months into the new year, it only mirrors the excitement of what to look ahead to in the coming weeks and months.
Having begun well, the government will now have to go the distance to decisively shift the policy mix. Gradualism may have been more sensible in the last few years, but this should be the year of a big-bang approach. If successful, this model of economic turnaround can be a kind of transformational illustration for others to emulate to counter persistent downturn and unemployment.
It’s about jobs, stupid!
For 64-year-old Mr Modi, at stake is a key election promise to lift the lowest living standards among emerging markets by creating jobs for about 100 million restive young Indians who will enter the workforce over the next decade or so.
During 2005-12, India added only 15 million jobs, a quarter of the figure added in the previous six years.
Creation of decent jobs outside of agriculture is one of the biggest challenges that confronts India in trying to achieve faster, sustainable and more inclusive growth.
Rapid obsolescence and fast-falling cost of technological acquisition is adding to the growing divergence between skills and jobs on offer, which can result in serious sociological imbalances. The idea of a permanent job has more or less disappeared.
This fits in perfectly into Polish sociologist Zygmunt Bauman’s classification of modern society that “cast[s] employment as a key — the key — to the resolution of the issues of, simultaneously, socially acceptable personal identity, secure social position, individual and collective survival, social order and systemic reproduction.”
A modern, competitive economy will have to offer its citizens an abundance of options to positively exploit a basket of opportunities. For this to happen, growth or rise in earnings, greater investment and, above all, speedier project implementation, are necessary conditions. Achieve this, and jobs and the ability to spend will follow.
Large corporations that are visibly and aggressively global are important. But these, in a sense, are incidental to India’s future, which appears to lie in the millions of small, micro and medium enterprises that are spread across the dark tanneries of Mumbai’s Dharavi slum township, in the room-sized waste-recycling units of outer Delhi and elsewhere in the country. Put together, these grubby factories contribute to half of India’s factory output, 45% of exports, and employ more than 60 million people.
Least recognised is the ailing agriculture sector, which employs half of India’s population, about 600 million people, produces no more than 15% of GDP and lives from monsoon to monsoon. Without any rapid improvement in infrastructure, education, or institutions there will be fewer jobs created outside of the farms, increasing pressure on land, and lowering incomes. Introducing urgent reforms in agriculture, India’s most unreformed and least productive sector should, therefore, be at the core of current policy-making.
Perceptions, reforms and expectations
Investment decisions, besides yields and returns, are also guided by perception. For now, the world seems to have got attracted to the energy of the new government. In the last two years, global credit rating agencies and investment banks had spared no punches in their criticism about the Indian economy’s management, marred by policy logjams, project delays and a string of corruption scandals. Given this backdrop, the $55 billion worth of FDI that India is likely to receive from just two sources — Japan ($35 billion) and China ($20 billion) — over the next five years is a welcome turnaround.
India needs more of such pledges to propel the investment rate to more than 40% of GDP. Foreign direct investment (FDI), besides bringing in the crucial dollars, also plays an ambassadorial role. Seen through the prism of trans-continental conduct, corporate giants are akin to global citizens helping countries reap the benefits of comparative and competitive advantage — both economically and strategically.
In 2010, US President Barack Obama arrived with the largest delegation, that included the who’s who of American business, to any country. Four years later, Prime Minister Modi made his maiden visit to the US, hard-selling the story why India’s rising economy has never mattered more than before. That Mr Obama is visiting India again shows the fast resetting relationship between the world’s two largest democracies.
Policy making, like cricket, is also a glorious game of timing. Decisions are predicated on a host of exogenous events such as the state of the world economy, commodity prices, weather conditions and the existing geo-political calculus among others. For India, many of these “unknowns” are currently in the most benign state in recent history. Oil prices are at a five-year low, the currency is stable, inflation is at multi-year lows and there is a general buzz about the prospects of Asia’s third largest economy.
A large number of boxes still remain to be ticked in the unfinished reforms task sheet. These include easier land buying rules, tax reforms, privatisation of loss-making state-owned firms and, the biggest of them all, steps to contain India’s bustling parallel economy where slush funds move around seamlessly hoodwinking authorities. The next 12 months could just be the right time to settle these for good, to remove constraints to growth and create job and income opportunities.
Foreign investors, both direct and financial, once again have shown a penchant to chase the India story. Managing these expectations and hand-holding transition for a country that has multiple objectives to achieve — from poverty reduction to attracting investment — is critical to reach the next level of equilibrium that has remained elusive over the last few years. It is about time to fully recognise that economic reforms are, in many ways, like a dose of antibiotics. Half-measures tend to linger and time is fast running out. So, it could be just the right moment for taking those “gut” decisions for the economy to again attain full fitness.