Four quarters ago when slowdown began knocking at the Indian economy's door, it was hard to imagine its sound and fury would be felt across industries as diverse as automobiles, consumer durables, FMCG, cement and real estate, even financial services, all at once. By that time, 3 of the four engines of the economy had already collapsed. The latest and the most potent one being -consumption - which accounts for 70 per cent of our GDP.
But for consumption, India's growth story would have faltered as far back as 5 years ago. After all, Engine number one --private investment -- had begun sputtering that far back. The second engine - exports - had peaked in 2013 but had been on a downward spiral since then. For the past 5 years, the economy was chugging along with just two engines: consumption and public investment. Which is why, the slowdown became so conspicuous as soon as consumption began failing about a year ago.
Two successive finance ministers, Piyush Goyal in Interim Budget in February and Nirmala Sitharaman in Budget 2019, missed golden opportunities to revive the consumption cycle. If they had, instead of searching for the bottom of the still decelerating economy, the GDP would be on the turnaround path by now. It has cost the Indian economy two precious quarters, probably more.
Not only did they fail to acknowledge that consumption was the Pied Piper of slowdown, they even tried to put the cart before the horse by seeking private investment instead of focusing on reviving consumption.
That was not to be. That can never be. Horse pulls the cart, just as consumption pulls investment, not the other way round. It was a mirage to expect private investment when industry's average capacity utilisation was still in the low 70s. Entrepreneurs are not that foolish.
Besides the misdirected Budgets of the two finance ministers, some commentary has muddled the waters further by suggesting that large scale disinvestment, structural reforms and export incentives can help turn around the economy.
Far from it. Structural reforms take 4-5 years to deliver results. We can't possibly wait that long to revitalise the economy. And disinvestment is a one-time bump in government's earnings.
Of course, both of these are required in the long run, but what a decelerating economy needs the most to start delivering results in one-to-two quarters is consumption revival. That has to be the immediate priority of our government as well, though it seems it isn't. Thereafter, we need economic measures in the medium and long term to sustain the revival.
HOW DO WE GET CONSUMPTION GOING?
It's simple. Leave more disposable income in the hands of individuals and more investible surplus in the hands of corporates. How?
- Force banks to transmit repo rate cuts (only 1.1 per cent of the 2.6 per cent repo rate cut has been passed on) seamlessly to the consumer and industry
- Tinker with GST and other tax rates as far as possible (auto industry, for instance, is asking for 18 per cent GST instead of 28 per cent)
- Implement new Direct Tax Code and corporate tax at 25 per cent across the board
- Perhaps, an economic stimulus with a combination of the above coupled with an investment allowance (deductible against tax payable) to encourage fresh investment into new plant and machinery
- But above all, accelerate public investment into infrastructure creation and hope that the contagion spreads through sectors such as steel, cement, wires, tiles, etc. All of the world's major economic revivals have happened via public expenditure alone
- Such immediate measures will begin to show results within 2 quarters.
Besides those immediate measures, the Indian economy requires short-term measures that will deliver results in 1-2 years and long term structural reforms that will deliver results in 4-5 years and beyond.
In the short term, India needs to:
- Make GST simpler; bring liquor, fuel in GST ambit as well
- Make IBC simpler and time bound
- Relax FDI rules
- Get RERA implemented across the country to resurrect real estate
- Reform banking
- Introduce investment allowance for a few years.
In the long run, we need structural reforms to make the recovery as robust and well entrenched as possible.
- Government, the biggest litigator with over half the pending cases in courts, must exercise caution in appeals
- Labour reforms that compress 40-odd labour codes and reduce compliance time and costs
- Land reforms to make land available to industry on-tap
- Ease compliance burden/ease of doing business across the country; not just in Mumbai and Delhi
- An attempt to revive the economy via structural reforms alone is a 5-year agenda. India can't wait that long; waiting for GST, IBC and banking reforms to settle down to trigger economic revival is taking it into a 2-3 year horizon. The nation can't wait that long either
There are only three ways to revive a decelerating economy in 1-2 quarters. And they are: Consumption, Consumption and only CONSUMPTION. Everything else is a longer term horizon that is essential but can't deliver immediate results, as well as consumption can.