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Vectoring The 3Fs Is Crucial

Dharmakirti Joshi     January 7, 2019

It would be fair to call the just-concluded 2018 a year of recovery as the economy rebounded from demonetisation and glitches in the levy of Goods and Services Tax (GST). A moderate pick-up in growth and low inflation despite spiralling crude prices also helped. But inflation was low mainly due to weak food prices, which meant farmers were - and are - in pain. Plus, the country did not escape the global tailspin in equities. The sell-off in emerging market bonds also hurt currencies of countries with current account deficits and India was no exception.

So where do we go from here?

Given that the external environment will remain stormy, with the US interest rates higher and protectionist winds still threatening growth and trade, India will have to lean on domestic factors in fiscals 2019 and 2020, and perhaps beyond that.

Essentially, the new year will be about staying on the curve, which will require fixing domestic priorities and doggedly pursuing them even as new global challenges loom. That is why the policy stance of the government becomes all-important this year. Of course, monetary and fiscal stimuli or farm loan waivers can push the growth cycle, but they do little to lift the growth potential of the economy or the trend rate of growth. The government, therefore, needs to focus on what can be called the 'three Fs'.

F1: Farm Distress Resolution

Despite three consecutive spells of normal rainfall and healthy farm output, agricultural distress is mounting. Higher minimum support prices, or MSPs, have not helped either, owing to sluggish procurement. Real and nominal agricultural gross domestic product (GDP) stood at 4.6 per cent and 4.9 per cent, respectively, in the first half of FY2018/19. In the second quarter, the nominal fell below the real GDP growth, indicating falling pricing power at the farm level. Many crops are still selling below the MSP.

The problem is that the brand new year could continue to be a challenging one for agriculture.

The World Meteorological Organization is forecasting 2019 as an El Nino year, and the odds are against another normal monsoon. So, it is important to focus on the long-term solution, which should be about disintermediation and clipping middlemen's margins.

The government could take a leaf out of the dairy farming experience. Unlike the growers of crops and vegetables or horticulturists, dairy farmers capture a larger part of the value chain. Replicating that will improve farm incomes while keeping food inflation low.

The received wisdom is that for unshackling agricultural markets, doing away with the Agricultural Produce Market Committee (APMC) Act is critical. But there has been very slow progress regarding this with states' resistance reflecting entrenched vested interests. State governments need to be pursued on a war footing to kick in lasting reforms rather than resorting to Faustian farm loan waivers.

Finally, the agriculture sector is supporting far too many people who need to be moved to other productive areas.

F2: Facilitating Job Creation

India will contribute about a quarter to the rise in global working-age population over the next decade. Given that, creating jobs and skilling people will pose a big challenge. What's more, swift technological advancements and advent of artificial intelligence will rapidly result in job displacement/disruption in the future. The net impact on jobs may not be positive as it has been in the past as jobs requiring cognitive skills are also at risk.

In a bid to counter medium- and long-term challenges to job creation, the government should focus on an expansive mix. Given the risk of monsoon failure this year, job safety net programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme must be leveraged well. Alongside, it is imperative to push economic activity in labour-intensive sectors such as manufacturing and construction and across services such as healthcare.

So far, the investment thrust has come from the public sector. Now, a decisive shift needs to be made towards a public-private-partnership model and asset monetisation to generate investible resources for infrastructure. It will also support private investment revival and job creation.

F3: Fiscal Prudence

Amid mounting global risks and slowing growth, maintaining macroeconomic prudence and reducing external vulnerability are critical as vulnerable countries tend to get punished more in a risk-off scenario. In 2013, we saw how the high and rising twin deficits - current account and fiscal - created huge volatility in Indian currency. Even with reduced vulnerability, the recent sell-off in emerging markets led to a sharper-than-expected weakening of the rupee.

Maintaining a tight fiscal ship helps keep vulnerability to global shocks in check, in addition to facilitating monetary easing for which conditions are ripening. In the medium term, India can offset some of the global headwinds by focussing on efficiency-enhancing domestic reforms.

Sure, India will rake in the benefits of past reforms on account of GST, Insolvency and Bankruptcy Code, financial inclusion, digitalisation, focus on infrastructure development and improving the ease of doing business. But these are still works in progress and need relentless execution in an election year.

A stable political outcome will make the ride less rough.

The writer is Chief Economist, CRISIL

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