Plugging Fissures Of The Economy

Elections are over and BJP has won handsomely. But elections are more about the political narrative than the hard economic realities. BJP in its campaign neatly side-stepped the poor performance of the economy by focusing on muscular nationalism which resonated with a people facing a crisis in their lives. The rate of growth is down to less than 1 per cent. The official figure of 7 per cent is based on the organised sector data only. The problem is worse confounded because the government is in a state of denial regarding its own agency’s data on employment. Since this data is used to calculate GDP, even GDP data becomes suspect. If the economy has lost 6 per cent rate of growth in the last thirty months that would amount to a loss of incomes of Rs.25 lakh crore.

If the rate of growth of the economy was 7 per cent there would be no need to juggle data. Farm distress and unemployment has got aggravated since demonetisation and farmers’ suicide data has not been published since 2016. These adversities are a result of the decline of the unorganised sector, employing 94 per cent of the workforce. This, in turn, has created a demand problem which has resulted in a decline in the Index of Industrial Production and stagnation in the automobile and FMCG sectors.

Demonetisation and the structurally flawed GST have laid low an economy which was doing well. Investment in the economy is stagnant because of the demand problem leading to capacity underutilisation. This is aggravated by the twin balance sheet problem of several key sectors including banks. While the bankruptcy bill is helping, high NPAs remain an issue.

The above presents an image of an unstable society and economy compounded by the external instability due to the actions of Trump and uncertainty in the petroleum sector. Prospects for India’s trade are bleak with Brexit, China slowing and the possibility of a trade war.

So, the agenda of the new government has to be a revival of demand and stability in society. For this, the unorganised sector has to be the focus. Something akin to the NYAY scheme would be required. Public expenditures in rural areas have to be stepped up in good quality education, health and rural infrastructure. Agriculture needs to be supported via effective implementation of the full cost support prices along with accelerated technology development and prioritisation of environment protection.

Taxation of wealth, gift and estate has to be made effective so that there is no revenue deficit in the budget. Income tax above 10 times the per capita income should be made more progressive. GST needs simplification with tax only on final goods and services at two rates.

Crony capitalism needs to be checked by making bank boards (including RBI) more autonomous. Increase in the efficiency of businesses and reliability of data has to be improved. Accountability of the political class, businesses, bureaucracy etc. is required to check black income generation and improve the productivity of investment. The task is onerous but doable.