Capitalising on India’s macroeconomic health
The coming year may be difficult as oil prices, inflation and the Fed’s interest rate may rise; we should thus leverage our position with reforms.
India’s macroeconomic situation is looking very strong. Even the IMF says that India is like a “last man standing” in a world that is struggling with low economic growth. China’s growth dropped below 7% for the first time after nearly three decades. Brazil and Russia are in recession, not growing. It is as if three of the four BRIC economies are under a curse.
By contrast, India’s performance is strong, and on an upward trajectory. The steep fall in crude oil prices has served as a de-facto fiscal stimulus, without any adverse side effects. It has brought about three benefits: lower fiscal and trade deficits and downward pressure on inflation. India’s exchange rate has been remarkably stable over past two years, especially when compared to emerging economy peers like Brazil, Indonesia and Turkey.
The various reforms and initiatives undertaken over the past year will lay a strong foundation for sustainable growth in the future. Each of the reforms individually may sound incremental, but cumulatively they have a strong impact. In any case, as articulated in the Economic Survey this year, the policy preference is clearly in favour of persistent and creative incrementalism, rather than big bang.
But there are worry signs despite the strong macro health. Exports have declined by more than 15% this year. The flow of bank credit, which signifies new capital formation, is at a multi-year low. Further, the macro rosy picture is not fully corroborated by the micro, i.e. the economic health of firms and households. Corporate quarterly results show a decline in revenues and a profit squeeze. Rural households are facing input cost inflation, while rural wages are almost stagnating, causing a dip in rural demand. Two consecutive years of drought have also led to rural distress in some parts.
So for long-term sustainable growth we need the micro and macro to weave together. The micro needs a series of reforms, all captured by an improvement in the “ease of doing business”. The macro needs a big push in infrastructure and construction. . The big push should be redirected to roads, irrigation, watershed development and railways. There is an opportunity for dovetailing the National Rural Employment Guarantee with public works of roadways and railways or afforestation and watershed development. Sectors like textiles can train workers in 45 days, and are in need of seasonal workers, making it a perfect fit for NREGS.
The coming year will not be as kind and gracious to the macro economy. Oil prices may move up. The fiscal situation will face pressure from pay commission obligations. Some inflation may inch up. Rate action by the US Federal Reserve might induce large panic capital outflows (or maybe not). Climate change and El Nino effects may be unkind to agriculture. And geopolitical uncertainty, not just in the Middle East, can lead to more and sudden disruptions.
Here are five specific policy issues that need to be addressed in the near future:
On trade: We need to be vigilant about the flood of imports, which are harvesting India’s high growth and consumer spending. Can the surge of e-commerce provide the impetus to suppliers from the SME sector and not just from China? Also remember exports create jobs, imports don’t. No sustained economic growth is possible if exports are declining as they are now.
On logistics: Almost 70% of the goods travel by road and only 30% by rail in India. This is exactly the opposite of global trends. This causes inefficiency, is bad for the environment and ultimately costly. Domestic logistics costs may be as high as 15% of transaction costs, decreasing our competitiveness in world markets. We need to urgently reverse this road-rail ratio in favour of railway for cargo.
On China imbalance: Indo-China trade grew dramatically in the past decade. But unfortunately it is highly skewed, and now India has a large bilateral deficit. To correct this, we need to offset the trade deficit with capital inflows from China. These can be non-dollar denominated, long-term funds into infrastructure. It also helps China diversify away from the US dollar, and is thus a win-win proposition. Of course, India should also aim to increase exports in sectors like pharmaceuticals and IT to China (and also Japan). More than 100 million Chinese travel as overseas tourists, but hardly 50,000 come to India. Surely this can change?
On shareholder agri-product companies: Farmers’ livelihood is an acute problem. Often the farmer loses both during a drought (crop failure) and a bumper crop (as prices crash). If farmers are organised as a shareholder company, then the company can access loans, build warehouse, start value-adding downstream businesses (processed food) etc. Unlike a cooperative, this works in the capitalist model. It’s time to proliferate this model across the country (it is already functioning sparsely in some states), with an appropriate policy framework.
On skilling: Education is a vast and unreformed sector. India’s future growth and encashing the demographic dividend cheque depends on production of human capital i.e. skilled workforce. There are already many skilling initiatives, overseen by the National Skill Development Corporation. Two additional features worth implementing: (a) nationally portable accreditation and diplomas, along with a national apprenticeship policy. (b) a “Naukri dot com” type portal for ex-servicemen from the armed forces. This is a captive labour pool of highly trained, disciplined, mature and talented workers, but alas their settlement is only toward security agencies. In other countries, employing “veterans” (as they are called) is a badge of honour for companies.
This is an exciting phase for the Indian economy. The macro is healthy, consumer confidence and optimism are strong. Sustained growth and finances for social development will come when the macro is coupled with reforms. The journey of reforms is never ending and is of a thousand miles. Let’s get started afresh.
(Ajit Ranade is the chief economist of the Aditya Birla Group. The views expressed are personal.)