The India’s economy is defying the pessimists, and the time is ripe to deepen structural reforms
The Indian economy continues to outperform the prognosis of its critics. This is clearly true of the GDP growth estimates in the third quarter; quite at variance with what the critics of the demonetisation exercise had assumed. No doubt there could be correction in the fourth quarter, primarily to factor the impact of the informal sector. It has never been easy to capture real time data on economic activity in the informal sector. It is recognised that apart from leads and lags, the conclusions are derivative using surrogates which detract both from their timeliness and accuracy. This is not a new problem and past estimates of GDP numbers have also suffered from multiple ex-post corrections as and when data becomes unavailable.
Digitisation dividend
Hopefully, moving towards greater digitisation and reducing dependence on cash transactions will accelerate the pace of financial inclusion and formalisation of the informal economy. Notwithstanding these, the dark prognosis of a collapse of GDP growth numbers, widespread unemployment and displacement of job workers coupled with rural distress now looks clearly misaligned with actual outcomes. The GDP estimates are supported by two other crucial independent international assessments last week. The first from the Article IV Consultations 2017 of the International Monetary Fund (IMF) and the second from the biennial Economic Survey of the Organisation for Economic Cooperation and Development (OECD). Both these have distinct commonalities. Both conclude that Indian economic growth is robust, propelled by consumption demand and accelerated structural reforms. Both favourably allude to a rule-based framework of aligning macroeconomic policies with global standards.
The overall macroeconomic framework, notwithstanding challenges, remains robust and credible. Continued fiscal consolidation, a modest current account deficit, subdued inflation, enhanced public and private consumption somewhat offsetting the depressed private investment support this conclusion. These augur well for continued growth buoyancy. The downside risks of exogenous shocks from sharp increases in commodity prices, particularly oil, a sudden global slowdown impacting remittances and exports or unpredictability relating to the Chinese economy now look modest. The growth projection of 7.5% (the higher side of the 6.75-7.5% range forecasted in this year’s Economic Survey) for the next fiscal is however contingent on resolving several short-term challenges.
Macro policies
First, the OECD’s survey raises concerns about India’s large interest payments due to the high levels of public debt as compared to other emerging economies. This is in consonance with the suggestions of the Fiscal Responsibility and Budget Management (FRBM) Review Committee chaired by me, which projects a declining debt-to-GDP ratio to approximately 60% by 2023. Analysts believe this may be our near optimum debt levels. While the Committee’s report is not yet in the public domain, there is broad consensus that the preferred trajectory of debt with enabling fiscal deficit targets is central to macroeconomic stability. India has come a long way in discouraging fiscal profligacy. The realisation that we are best served by improving the quality of public expenditure than enhancing budgetary outlays reflects responsible leadership. It is increasingly cognisant of the inherent vulnerabilities of a fragile economy like ours. No doubt fiscal rectitude must be combined with space to enhance public outlays, particularly in infrastructure, health and education.
Second, the health of the banking and financial sector. The twin balance sheet problem of both corporates and banks, highlighted in the Economic Survey, has a relationship but would need differentiated actions. Easing one will no doubt ameliorate the other but policy frameworks are not necessarily symmetrical. The concept of a centralised Public Sector Asset Rehabilitation Agency (PARA) envisaged as a ‘Band Bank’ spin-off model has gained some traction. It would, however, be naïve to believe that this represents a systemic solution to the ailments of the banking sector. The classic issues of not confusing between the stock and the flow would need to be addressed. Besides, it is not easy to overlook moral hazard questions when it comes to taking an ‘appropriate haircut’ by all stakeholders and without assigning responsibility for the ills of the past.
Are we assured that they will not resurface in altered garbs? The governance architecture embedded in several actions and intended autonomy cannot be totally divorced from the ownership pattern. Creating an enabling political milieu for deeper reforms is inescapable. Expecting the ruling party alone to invest excessive political capital in this endeavour will have little traction. At the same time, a belief that the present trajectory of banking reforms is adequate to address the deeper malaise of the sector would be misplaced. The Indradhanush I has distinct positives. The Indradhanush II is in the offing, post the Asset Quality Review to be completed by March 31.
Rule-based management
In this context, creating an institutional framework or mechanism to seek broader consensus has some advantages. This also ties up with what the OECD’s Economic Survey and the IMF’s report describe as a progressive move to a more rule-based management of the economy. The constitution of the Monetary Policy Committee, GST Council, Banks Board Bureau, are robust examples. Could we, for instance, consider the constitution of a Banking Council to facilitate a dialogue with political parties and stake holders on a new banking road map? Extensive analytical work by several committees and commissions like the Narasimham Committee, P.J. Nayak Committee, Gopalakrishna Committee, to mention a few, have critically examined the past and suggested future actions. This Council could debate, discuss, and seek to fortify the ingredients of the ongoing initiatives. In this endeavour, seeking consensus on a forward banking reform path would be the principal mandate of the Banking and Finance Council. The problem is somewhat complicated, by the Reserve Bank acting as the principal banking ombudsman with inherent conflict of interest. In the long run, we need an alternative mechanism for the banking sector. This will not happen overnight; far-reaching structural changes need perseverance and tenacity. Fortunately, this government has the mindset to move away from micromanaging the economy.
The GST transformation
Finally, for a change, balanced regional development and combining growth with employment has received extensive attention in both these reports. No doubt, the GST (Goods and Services Tax) regime and decisive move towards formalisation of the economy using technology would reduce disparities.
Local government entities need greater empowerment. These go beyond the enhanced devolution of resources based on the recommendation of the Thirteenth Finance Commission, more importantly of the Fourteenth Finance Commission. Making grants available in two parts — a basic grant and performance grant — will make a difference. Enabling local bodies to impose and realise property taxes and other levies would strengthen their financial viability. In fact, the Fifteenth Finance Commission, yet to be constituted, while reviewing the implementation of past recommendations can consider incentivising States on empowerment and delegation of powers to local bodies. Seeking to replicate best governance practices in labour and product markets among the States could also prove beneficial in mitigating inter-State growth divergence. There are other recommendations in the IMF and OECD reports relating to education, health, and tax changes, to name a few, which deserve separate treatment.
It would be dangerous if the decision-making ethos is stymied by growing complacency. The future may look bright but pursuing and deepening structural reforms is the way forward. The political leadership is sagacious in recognising this. After all, as Albert Einstein once said, “We cannot solve our problems with the same thinking we used when we created them.”
The Indian economy continues to outperform the prognosis of its critics. This is clearly true of the GDP growth estimates in the third quarter; quite at variance with what the critics of the demonetisation exercise had assumed. No doubt there could be correction in the fourth quarter, primarily to factor the impact of the informal sector. It has never been easy to capture real time data on economic activity in the informal sector. It is recognised that apart from leads and lags, the conclusions are derivative using surrogates which detract both from their timeliness and accuracy. This is not a new problem and past estimates of GDP numbers have also suffered from multiple ex-post corrections as and when data becomes unavailable.
Digitisation dividend
Hopefully, moving towards greater digitisation and reducing dependence on cash transactions will accelerate the pace of financial inclusion and formalisation of the informal economy. Notwithstanding these, the dark prognosis of a collapse of GDP growth numbers, widespread unemployment and displacement of job workers coupled with rural distress now looks clearly misaligned with actual outcomes. The GDP estimates are supported by two other crucial independent international assessments last week. The first from the Article IV Consultations 2017 of the International Monetary Fund (IMF) and the second from the biennial Economic Survey of the Organisation for Economic Cooperation and Development (OECD). Both these have distinct commonalities. Both conclude that Indian economic growth is robust, propelled by consumption demand and accelerated structural reforms. Both favourably allude to a rule-based framework of aligning macroeconomic policies with global standards.
The overall macroeconomic framework, notwithstanding challenges, remains robust and credible. Continued fiscal consolidation, a modest current account deficit, subdued inflation, enhanced public and private consumption somewhat offsetting the depressed private investment support this conclusion. These augur well for continued growth buoyancy. The downside risks of exogenous shocks from sharp increases in commodity prices, particularly oil, a sudden global slowdown impacting remittances and exports or unpredictability relating to the Chinese economy now look modest. The growth projection of 7.5% (the higher side of the 6.75-7.5% range forecasted in this year’s Economic Survey) for the next fiscal is however contingent on resolving several short-term challenges.
Macro policies
First, the OECD’s survey raises concerns about India’s large interest payments due to the high levels of public debt as compared to other emerging economies. This is in consonance with the suggestions of the Fiscal Responsibility and Budget Management (FRBM) Review Committee chaired by me, which projects a declining debt-to-GDP ratio to approximately 60% by 2023. Analysts believe this may be our near optimum debt levels. While the Committee’s report is not yet in the public domain, there is broad consensus that the preferred trajectory of debt with enabling fiscal deficit targets is central to macroeconomic stability. India has come a long way in discouraging fiscal profligacy. The realisation that we are best served by improving the quality of public expenditure than enhancing budgetary outlays reflects responsible leadership. It is increasingly cognisant of the inherent vulnerabilities of a fragile economy like ours. No doubt fiscal rectitude must be combined with space to enhance public outlays, particularly in infrastructure, health and education.
Second, the health of the banking and financial sector. The twin balance sheet problem of both corporates and banks, highlighted in the Economic Survey, has a relationship but would need differentiated actions. Easing one will no doubt ameliorate the other but policy frameworks are not necessarily symmetrical. The concept of a centralised Public Sector Asset Rehabilitation Agency (PARA) envisaged as a ‘Band Bank’ spin-off model has gained some traction. It would, however, be naïve to believe that this represents a systemic solution to the ailments of the banking sector. The classic issues of not confusing between the stock and the flow would need to be addressed. Besides, it is not easy to overlook moral hazard questions when it comes to taking an ‘appropriate haircut’ by all stakeholders and without assigning responsibility for the ills of the past.
Are we assured that they will not resurface in altered garbs? The governance architecture embedded in several actions and intended autonomy cannot be totally divorced from the ownership pattern. Creating an enabling political milieu for deeper reforms is inescapable. Expecting the ruling party alone to invest excessive political capital in this endeavour will have little traction. At the same time, a belief that the present trajectory of banking reforms is adequate to address the deeper malaise of the sector would be misplaced. The Indradhanush I has distinct positives. The Indradhanush II is in the offing, post the Asset Quality Review to be completed by March 31.
Rule-based management
In this context, creating an institutional framework or mechanism to seek broader consensus has some advantages. This also ties up with what the OECD’s Economic Survey and the IMF’s report describe as a progressive move to a more rule-based management of the economy. The constitution of the Monetary Policy Committee, GST Council, Banks Board Bureau, are robust examples. Could we, for instance, consider the constitution of a Banking Council to facilitate a dialogue with political parties and stake holders on a new banking road map? Extensive analytical work by several committees and commissions like the Narasimham Committee, P.J. Nayak Committee, Gopalakrishna Committee, to mention a few, have critically examined the past and suggested future actions. This Council could debate, discuss, and seek to fortify the ingredients of the ongoing initiatives. In this endeavour, seeking consensus on a forward banking reform path would be the principal mandate of the Banking and Finance Council. The problem is somewhat complicated, by the Reserve Bank acting as the principal banking ombudsman with inherent conflict of interest. In the long run, we need an alternative mechanism for the banking sector. This will not happen overnight; far-reaching structural changes need perseverance and tenacity. Fortunately, this government has the mindset to move away from micromanaging the economy.
The GST transformation
Finally, for a change, balanced regional development and combining growth with employment has received extensive attention in both these reports. No doubt, the GST (Goods and Services Tax) regime and decisive move towards formalisation of the economy using technology would reduce disparities.
Local government entities need greater empowerment. These go beyond the enhanced devolution of resources based on the recommendation of the Thirteenth Finance Commission, more importantly of the Fourteenth Finance Commission. Making grants available in two parts — a basic grant and performance grant — will make a difference. Enabling local bodies to impose and realise property taxes and other levies would strengthen their financial viability. In fact, the Fifteenth Finance Commission, yet to be constituted, while reviewing the implementation of past recommendations can consider incentivising States on empowerment and delegation of powers to local bodies. Seeking to replicate best governance practices in labour and product markets among the States could also prove beneficial in mitigating inter-State growth divergence. There are other recommendations in the IMF and OECD reports relating to education, health, and tax changes, to name a few, which deserve separate treatment.
It would be dangerous if the decision-making ethos is stymied by growing complacency. The future may look bright but pursuing and deepening structural reforms is the way forward. The political leadership is sagacious in recognising this. After all, as Albert Einstein once said, “We cannot solve our problems with the same thinking we used when we created them.”
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