Modi Has Three Months To Fix The Economy: We Need To Abandon Fiscal Roadmap This Year And Next

The sharp fall in industrial output by 4.3 per cent in September – widely expected after core sector output fell by 5.2 per cent – sets the stage for a gloomy first quarter gross domestic product (GDP) number. Growth could be well below the 5 per cent registered in the June quarter. Second quarter GDP figures are expected by the end of November.

There could be a modest revival in the October-December quarter, but those numbers will not be with us until the end of February 2020, which would be well after the next budget is presented. This gives the Narendra Modi government less than three months to get its economic act together in one well-thought-out package. Piecemeal announcements about rescue packages for some sectors and tax cuts are fine as they come, but they do not present a coherent picture of how the government will tackle the cyclical as well as the structural slowdowns that have coincided this time.

If the Prime Minister has not already got a core economic think-tank and bureaucrats working out the details of short-, medium- and long-term measures to lift the economy out of the ditch, he had better get a move on. They should be working 24x7 between now and the budget due in early February.

The first requirement is conceptual clarity on what needs to be done in the short term, what needs to follow as a medium-term reforms package, and ending with very long-term structural reforms plan that goes beyond just economic policy reform.

Here’s what needs to be done in the short term, as the economic pain gets more acute for vulnerable sections of business and society.

First, forget about fiscal consolidation for this year and the next. Focus instead on making the fiscal numbers more credible, by bringing back into the deficit numbers the off balance-sheet borrowings of entities like the Food Corporation of India, the National Highways Authority of India, etc. This means clearing their dues and making them less dependent on borrowing. This will push up the fiscal deficit, raising it well above the fictitious number of 3.3 per cent given in the budget to something in the range of 5-6 per cent of GDP. The markets and rating agencies will swoon, but never mind them. It is vital to get the economy off the ropes and back in fighting form.

Second, expedite all government tax refunds and pay off dues to exporters, small and marginal firms, and construction companies doing work for government. Construction is a great job creator, and any dues payable to them for work done for government tends to play havoc down the line for their own suppliers and ancillaries. If government were to clear all its dues quickly, it would again push up the fiscal deficit in the short run, but as money gets pumped into the economy, some of it will come back in the form of taxes and revenues as consumer and corporate spending rises. Most important, it will make many companies viable and prevent further loan defaults.

Third, speed up bank recapitalisation, and also create a TARP (troubled asset reconstruction programme) for systemically important non-bank finance companies (NBFCs) facing a liquidity crisis. Most troubled NBFCs are not actually insolvent, but are unable to raise fresh money on reasonable terms due to lack of market confidence in their survival. The money already lent to them is being called back by banks and other investors, including mutual funds, making things worse even for viable companies. A TARP, combined with some targeted mergers with strong public sector banks, will instantly make these NBFCs credit-worthy, thus enabling them to avoid defaults and begin lending again.

Fourth, a Rs 25,000 crore fund for stalled real estate projects has already been announced by the finance minister, covering over four lakh properties across major metros. The funding needs to be increased at least three- or four-fold to really bring the realty sector back to life – and help home buyers get the properties they want.

Fifth, plan another dollop of PM Kisan Samman of Rs 6,000 per annum per household for the rural sector, this time targeting not just the landed, but also farm labour. This, together with the enhancement of MGNREGA spends, will put money in the hands of the rural sector, ending the downward swing in consumption.

Sixth, troubled sectors like telecom need to be given easy terms for paying or repaying spectrum and licence fee dues in order to make them cash-positive again. Spectrum prices for future auctions need to be calibrated downwards so that the sector’s future viability remains intact, and the 5G spectrum auctions can be funded comfortably by banks.

These measures, all for the short term, will get consumption back to normal levels by mid- or late-2020, enabling banks to resume lending and corporates to rethink investment plans. The price to pay is a higher fiscal deficit this year and the next. The fiscal roadmap should be rejigged to restart its downward journey from 2021-22.

The short-term emergency measures need to be augmented with medium-term strategies to raise revenues without pinching corporates or taxpayers.

The right way to do it is through asset sales, especially infrastructure and public sector assets that can be sold to domestic and foreign players. Infrastructure assets like pipelines, electricity grids, highways and landed properties should be auctioned to foreigners on 20- or 30-year leases to raise more money.

Privatisation clearly has to be a part of the strategy. While Bharat Petroleum, Shipping Corporation, Concor and Air India are already on the block, the relevant nationalisation acts need to be changed to allow for the sale of some public sector banks in the coming years. Banks currently left out of the consolidation and merger process (eg, Bank of India, Uco Bank) should be put on the block once the laws are changed and they are adequately capitalised. This will leave six major banks in the public sector – State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Indian Bank, and Union Bank of India – after some smaller banks are merged with them.

As for factor market reforms, it would be best if labour, land and agricultural market reforms are fully completed in calendar 2020 – the former two by Parliament, and agricultural reforms at the state level. States must be challenged to reform agriculture, and incentivised through grants for it. At the central level, the food procurement scheme needs to be rethought from the ground up, so that subsidies do not eat up all of the budget.

The long-term reforms are less economic, more institutional and constitutional.

The economy cannot move to a higher growth path without reforming 1) the police-courts-legal-justice system; 2) the bureaucracy, and 3) Centre-state power structures.

There is no point reforming the capital, labour and land markets if the courts are going to take 20 years to enforce contracts and corrupt fixers rule the system. Police, legal and judicial reforms could take all of five to 10 years to find a consensus for implementation. If the work does not begin now, it cannot be finished even by 2030.

The bureaucracy is all about power and pelf, little about performance. The system does not reward performance. In fact, it can even penalise it. Apart from a new system of fixed and variable pay, reform of the bureaucracy must involve a fairer system of vigilance supervision than what we now have in the Central Vigilance Commission and the Central Bureau of Investigation. The system discourages risk-taking, which is essential for performance. If every bureaucratic decision that goes wrong is viewed from the lens of corruption or crookery, why would any bureaucrat put himself out on a limb to deliver more?

The intake of specialists in the upper reaches of the bureaucracy – begun in a small way last year – needs to be accelerated. The issues that bureaucrats have to decide on in a technology-mediated world are complex, and bureaucrats are often not the best-placed to decide on them. They need experts to help them make the right decisions.

Lastly, power needs to be devolved downwards from Centre to states and further to cities and local bodies.

We are getting sub-optimal governance because of centralisation of economic power at the Centre, and equally so at the state level. The Constitution needs to be rejigged to allow for the Centre to focus on fewer subjects, with the states being empowered to make policies in many more areas of the concurrent list. But cities really need to become the new power centres of India, as they have to drive economic growth and jobs.

India needs short-term, medium-term and long-term measures to revive growth and make itself a $10 trillion economy over the next 10 years. Reaching the $10 trillion target in 10 years is easier than reaching the $5 trillion objective in the next five as faster growth needs deeper reforms that go beyond just economic policies. And those reforms will take years to deliver results.