Chanakyan: 2020

This was published in The Economic Times on 15th Sep 2020

The quarterly GDP growth print, expectedly, came in as a crater. While a large negative print was inevitable given the impact of lockdowns across the country, the extent is still jaw-dropping. India’s June-quarter GDP fell the most amongst major economies in Asia. Reams have been (and will be) written on the why’s and how’s of our economic travails. A bigger, perhaps more relevant issue though, is around “what next”?

Privatisation, labour reform, fix the financial sector, cut fiscal deficit, ease of doing business, trade open-ness – the deluge of prescriptive commentary today gives nothing more than a weary sense of déjà vu and ennui. The biggest and most fundamental risk that we are encountering is one of imagination. We seem to have run out of ideas.

In the last 6 years, some of the biggest boxes of the “reforms” check-list have been checked. GST, Inflation Targeting/MPC law, FRBM adherence, jump in Ease-of-doing-business rankings, Insolvency&Bankruptcy Code (IBC), market-pricing of petroleum products – the list is long and impressive. Growth has flagged despite the impressive list. Many of the purported reforms have been mired in execution challenges, creating new clamour for further reforms of reforms already implemented!

Post mortems are at least partially useful. Many of these reforms come from established templates elsewhere – especially in Europe, Americas and parts of East Asia. GST, eg, is in vogue in several small(er) Asian/European countries, but not in the US or China, large complex countries. The theoretically pristine GST model – a single rate across all goods and services – was always an impossibility in the political economy of a large raucous democracy. The compromises that had to be struck in order to enable a modicum of centralization of indirect taxes are now proving to be bigger millstones than the ones that GST ostensibly flattened out. Inflation Targeting, a monetary policy framework with a variable (and chequered) legacy globally, has come into similar questions. A hawk-eyed view of a solitary variable, inflation, has potentially sacrificed growth in its wake. In a country with low per-capita income, sacrificing growth for inflation isn’t a policy choice that should be left to un-elected bureaucrats following a rule-book. Last week, even the US Fed (which follows a dual mandate policy framework – inflation and employment), effectively junked Inflation Targeting as a policy goal in view of the pandemic impact. In sharp contrast, minutes of India’s MPC meeting showed MPC members worried largely about inflation and impact of monetary policy measures on spiking inflation.

It is in the background of the above that the proposed solutions to the current crisis evoke more skepticism than confidence. India needs fresher ideas, even if they are not part of the Washington Consensus list.

For starters, there is a case to abandon theoretical puritanism – whether on banking asset quality or central bank independence.

Of the 4 pillars of the economy, viz, Consumption, Investment, Government expenditure and Exports; only one is a realistic fast-acting game in town – the Government. For the government to start spending, it needs a credible financing plan. There are hypotheses around raising resources via asset sales (or going to IMF for a loan), but they are mostly in the realm of Aesop’s Fables (given time taken for a typical PSU asset sale) than realistic policy prescriptions. Monetisation of deficit (or a vastly expanded RBI Open Market Operations – OMO – programme) present the most viable source of raising resources today. Ideological (and/or theoretical) squeamishness around “printing money” has a time and place for debate, not when income destruction and large scale unemployment are the calling cards of the economy.

Transfer of government financing to private pockets – via tax-cuts, income support, direct benefit transfers – is the fastest mode of kick-starting consumption. And consumption is the second quickest path to kick-starting the economy. While textbooks (and the commentariat) privilege infrastructure spends to consumption, scaling up infrastructure projects with long lead times, variable lockdowns in several parts of the country and broken supply chains (and labour availability) in several parts of the country make execution risk too high for a fast-acting palliative. On the other hand, extra income in the pockets of citizens would result in a faster recovery in discretionary spends – autos, high value electronics, homes – enabling a faster utilization of capacity slack in a range of industries. In the process, it will energise a swathe of associated ancillary, employment-intensive sectors (retail, transport, support services). The Indian consumer has been the bedrock of growth in the last few years and remains the key to coming out of this logjam.

Second order policy has to fix the financial system. Not via the usual prescriptions of “reforms” – recognize NPA, recapitalize banks, sell-off distressed assets – most of them are long-winded, time-consuming and finally present a time-constraint to kickstarting the economy that we need today. The solution, today, has to go back for the future. Increase forbearance on stressed loans across the board, allow banks (especially Public Sector Banks) to restructure loans, extend maturities and let the denominator (ie, total loan book) growth take care of the problem. A very large part of the banking system in India is state-owned – it gives us a big cushion to go for growth without worrying about risks of insolvency – time to take advantage of that cushion.

The third order policy intervention needs to be in Real Estate (RE). It is the largest employment sink in the country. The sector was already stressed, the lockdown and attendant impact (on demand and labour availability) have exacerbated the crisis. A partial nationalization of stressed projects, via a special legislation if required, will kill several birds with one stone – bring employment back to life, increase stock of housing in urban India causing a downward pressure in prices, backstop financial sector exposure to RE. Not all stressed projects are perhaps viable, but some could well be (if completed on time, and with the discount of developer equity having been reduced to zero). Carving out a chunk of the fiscal stimulus to directly take-over and complete these projects could well end up with a net gain to the taxpayer in the years to come. Even if it means a net fiscal outgo, the net benefits of kickstarting a sector that provides 40% of Gross Fixed Capital Formation (or Investment) are very high.

For too long now, India’s economic policymaking has fallen into a lazy rut – analyzing the same ideas and litigating the quality of execution. There is a fear of trying out something new, something else – almost as if there is a fear of greater failure for a radically new idea than by messing up execution of a well-worn one. Desperate times call desperately for fresher ideas – it is time for the government to take the plunge. At least India will make new mistakes, giving us newer insights, rather than getting a feeling of déjà vu wretchedness.