Growth under the previous government that improved to over 8 per cent from the lows five years ago, has slowed down noticeably, particularly in last fiscal, when it came down to as low as 5.8 per cent, about 240 bps lower than the peak. The deceleration is apparent in the softening of consumer spending, mainly on discretionary items like automobiles, consumer durables and high-end FMCG products. The rural distress, as evident by the slowing agriculture GDP growth that fell to negative territory in Q4, played a big part in the fall.
With the Budget round the corner, the main task before the new government, is to work towards growth recovery right from the word go. While the government has been able to keep inflation under control, this phase of low inflation is now prolonged, which is also symptomatic of a demand slowdown. Although latest RBI survey shows overall capacity utilisation has improved to 77 per cent in the fourth quarter of 2018/19, a six-year high, it is limited only to selected sectors, and large manufacturing units are still operating much below full capacity. This would dampen the already weak investment sentiment, which in turn would have a direct bearing on job creation and its impact on spending and growth.
The prolonged food disinflation has affected farm incomes that have led to the current agrarian distress and kept rural demand sluggish. Agriculture remains a vital cog for the economy and thus needs special attention to address the structural imbalances, and must be guided by the aim of making agriculture more productive and increasing farmer's income. Besides the impetus on better irrigation techniques and investments in rural supply chain infrastructure, crop yields need to be enhanced through greater farmer knowledge related to higher yield crop varieties, soil quality, flood and drought resistant seeds, etc. There should be greater focus on horticulture, where production has exceeded those of foodgrains for the sixth consecutive year and a stronger linkage of agriculture with food processing. Removal/rationalisation of wasteful subsidies can help in changing cropping patterns leading to farm incomes. Stable import and export policy related to agri-produce is also essential.
Fiscal stimulus, in the form of judicious tax cuts may be considered to revive growth, as it worked well earlier, notably in 2009 in the aftermath of the global financial crisis. This would ensure more disposable income to increase spending. Businesses, faced with flat earnings need to have corporate tax rate lowered to 25 per cent. Only 7,000 companies out of around 8 lakh that file tax returns, and who contribute the most to the tax collections, still pay tax at 30 per cent. This goes up to almost 50 per cent if we add various cess, surcharges and the dividend distribution tax, making India one of the highest tax jurisdictions globally. This is exacerbated by higher cost of lending as RBI's rate cuts has had limited impact on bank's lending rates, which remain quite high. Banks on their part are also hamstrung by high NPAs and other legacy issues, besides high cost of deposits. The government must therefore look into injecting more capital into public sector banks through recapitalisation which will provide headroom for future bank lending. Banks also need to make more recoveries under IBC, which is maintaining good progress.
GST, one of the landmark reforms undertaken so far, has more or less stabilised by now, with collections gradually rising though still below targeted levels. This should set the stage for more reduction in rates and slabs in future as an alternative means to stimulate demand as it helped manage inflation when the levy was initially rolled out. For example, automobiles and cement are still placed in the 28 per cent GST bracket. The focus has to be on better compliance and expanding the base, including individual taxpayers, as it is estimated that only 14 per cent of the potential taxpayers are currently in the tax net.
The Indian economy must become more competitive. Despite substantive gains in World Bank's Ease of Doing Business (EoDB) rankings, it would matter little if we are unable to compete on an even footing. Absence of proper alignment of laws leads to higher compliance costs. The proposed reforms in the areas of labour, land acquisition are almost at standstill. There is need for simplification of rules and regulations, and lay clear procedural standard on each issue to improve the situation. The previous government had already prepared the basic template by combining around 44 labour laws into 4 specific codes, which should be taken up at once. Moreover alternative modes of land acquisition like land pooling and land consolidation should be encouraged. The New Industrial Policy on the anvil, needs to be rolled out at the earliest.
The previous government had also laid a big emphasis on reducing the infrastructure deficit, particularly roads and ports, with renewed emphasis on waterways after a long gap. While roads have been a positive outlier, with pace of road building up 2.5 times, further push was hindered by problems in getting through clearances and timely land acquisition for industrial purpose. Also progress on other infrastructure fronts has been slow. The government, therefore, needs to fast-track the process of project clearances, especially the work on the Dedicated Rail Freight Corridors needs to be accelerated, which have already missed quite a few deadlines. This will go a long way to improve our competitiveness.
Whether there will be enough fiscal stimulus in the budget would however depend on fiscal space available to the government. The ambit of the PM-KISAN has already been expanded, and now 14.5 crore farmers are eligible for the benefit under the scheme. The government is also wary to maintain the fiscal deficit target as higher deficit would mean more borrowings leading to higher interest rates and crowding out. It is therefore essential to raise non-tax revenue, particularly disinvestment and strategic sales. Rationalisation of existing farm subsidies could help double the income benefits to farmers, as it is more effective and efficient as exemplified by the substantive gains made through DBT, over Rs 1.42 lakh crore in last 5 years. The onus is on the government is thus to put the wheels into motion again so that the economy rides back on the growth path sooner.
(The author is Director, JK Organisation)
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