Economy and Business

Politics and Productivity

Many analysts and commentators now regard India as the fastest growing economy in the world. The decline in the Chinese economy has made India the cynosure. India has to choose between needed reforms now for faster growth or a 'scorched' economy resulting from the Congress's policies analogous to the centuries-old 'scorched earth' tactic of military defence, that denied all local assets to an invading army.

Dec 23, 2015
By S.L.Rao
Many analysts and commentators now regard India as the fastest growing economy in the world. The decline in the Chinese economy has made India the cynosure. India has to choose between needed reforms now for faster growth or a 'scorched' economy resulting from the Congress's policies analogous to the centuries-old 'scorched earth' tactic of military defence, that denied all local assets to an invading army.
India benefited from the collapse in crude oil prices. That has considerably moderated inflation. The import bill has declined sharply. In spite of the decline in the economies of China and Europe, and the consequent fall in our exports, the balance of payments are, after many years, not a worry. The statistical 'jugglery' in estimating the gross domestic product has perhaps added almost 1 per cent to growth figures. Even recognizing this, India's GDP growth is better than of most other countries.
Yet, food price inflation has become a burden on the poor. The excessive rains in parts of India (particularly the south) and drought in others (for example, Vidarbha), have caused high prices and, at times, poor availability of pulses, vegetables, fruits, and so on. Rural incomes are adversely affected. There is little growth in the numbers of urban income-earners.
While private investment expenditure has risen, it is not of high magnitude. The real estate market is glutted, but developers are holding on to their stocks without reducing prices. In spite of a decline in interest on home loans, there is no rise in demand. Decline in real estate off-take, huge sums locked up in stranded assets in private and public investments in electricity undertakings, and in private investments in other infrastructure, have further weakened the balance sheets of nationalized banks.
Public investment has risen and will rise farther as government programmes for roads, railways, ports, metros and other infrastructure get under way. The pay commission bonanza to Central government servants will spread to states. There will be a rise in consumer expenditures (already visible in car sales and bank lending for them). Manufacturing output is rising, but slowly. Wages and employment are unlikely to have shown increases.
Thus India is in a relatively sweet spot compared to many other countries. But many legislative and administrative actions are necessary before India can benefit from the situation.
Private domestic and foreign investors must actually invest instead of merely stating intentions to do so. Funds availability for investment must increase greatly as must their diversity of sources. Banks need considerable recapitalization. Presently, the banks are an important source for capital investments. Governments (Central and those of the states) must cease to be bottlenecks. Permissions must be accelerated for all government clearances and they must come quickly, together and not over a lengthy period. These include environment and forest clearances, building clearances, pollution clearances, factory clearances, and so on.
Industrial development, urbanization, education and skills development are the only ways to reduce the excessive pressure of population on agriculture and rural India, resulting in its poverty. The migration of populations from rural to urban areas must increase even faster. This calls for many actions. Easier acquisition of land for industry is an essential precondition. Land will be required for new urban conglomerations as well. The living and working conditions in urban areas must improve if investors are to come in and bring in new technologies. Presently, Indian cities are filthy, with heaps of garbage, public defecation, clogged drains, potholed roads, unreliable electricity supplies, inefficient public transportation, lack of safety for women, poor quality of education at all levels, with faculty shortages and often of poor quality. Health services are also poor, especially for lower income groups. Social welfare schemes must be streamlined to limit benefits to desired beneficiaries. They must not leak to many others, and also not be stolen by bureaucrats and politicians. Direct bank transfers are an answer and need secure identification of beneficiaries and opening bank accounts for them.
India has no large factories with large numbers employed in labour-intensive manufactures like garments and leather. Bangladesh and Sri Lanka have much larger ones. Our limitation is rigid labour laws. They have to become flexible and allow easy expansion and reduction of employees, depending on market conditions (with suitable compensation).
These are only some of the areas in which action must be taken by governments at the Union, state and local municipal levels. People's attitudes to work, accountability, bribery and corruption, and habits like public defecation, must also change. Only then can we take full advantage of the favourable circumstances in which India is placed just now. We can then look forward to accelerated economic growth and employment. However, these favourable circumstances will not last forever. We must take advantage of them without dithering. The prime minister has a programme for almost every one of the items for action to be taken mentioned earlier. Many are being implemented.
Sadly, politics has entered the scene. This Bharatiya Janata Party government has, on the whole, a poor quality of ministers. They rarely initiate action and follow through. Their experience in getting legislation through parliamentary committees and getting them voted for is limited. The prime minister is a great crowd-puller and orator. He is, however, poor in the real world of political exchange. He has to learn to create and interact with many networks of politicians from other parties. The prime minister has, for 18 months, treated the main Opposition party, the Congress, with arrogance and derision. He has now realized that he needs to pass legislation to get reforms through. He needs their support.
Meanwhile, the principal but minuscule opposition, the Congress, after being electorally decimated has no vibrant leadership or ideas. What it has are its old shibboleths. Its strategy, exemplified by Rahul Gandhi, seems to be of preventing the BJP from getting any policies legislated that might give it electoral credit. Indeed, it is a policy of scorching the economy to prevent policies that would be of benefit to the the BJP and the country. The Congress plan would be to take the credit for cleaning up when it comes to power (it hopes) in 3 years.
The spate of investigations and charges against Congress leaders in recent months was to be expected. But owing to its poor political common sense, like the Janata Party in 1977, the BJP's timing has been appalling. It needs the Congress to pass key legislation and its first three years should have focused on passing legislation for which it should have developed harmonious relationships. These accusations should have been pursued closer to the time of the next general elections. The only recourse now is for the BJP governments to frame legislation in a manner that the Congress can also take credit.
The Congress must also be awakening to the unsympathetic media comments on its disruption of Parliament, especially after the court ordered the trial of the Gandhis. The Congress should subdue its hysterical responses.
It is clear that the survival of the Gandhi family's power is a higher priority for the party leadership than the immediate good of the nation. The economy can move faster even without the Modi government passing new Central legislation. Friendly state legislatures can get Central approval for legislation on concurrent subjects and begin reform in those states (for example land law changes, labour law reforms). What will be left are the major items like the goods and services tax which need parliamentary approval and even changes in the Constitution. The economy will grow faster but not as much as it could have. The Congress will not gain. The BJP will and can point to the Congress preventing faster growth. The Congress must choose between scorching the economy, as the Gandhi family wants, and India's accelerated growth.
The author is former director-general, National Council of Applied Economic Research
The Telegraph, December 23, 2015

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