Stoke “animal spirits” to let India breathe again


The debacle in Jharkhand for the BJP will hopefully resonate more loudly in Nagpur, the RSS’ headquarters, than did the labored breathing of the economy over the past six quarters. After all, politics is the life blood of India. And political dominance follows economic growth and well-being. This was the message of development and jobs for all, which galvanised India in 2014 to vote for Narendra Modi as Prime Minister.

Hubris takes its toll

Sadly, the hubris of being in office for a second term has diverted the government’s attention to its unfinished political agenda, which seeks to raise allegiance to Hinduism to the same level as allegiance to the Constitution of India — somewhat of an impossibility, given that the tenor of the Constitution is secular, even if the word “secular” -— inserted in the Preamble in 1976 by Indira Gandhi’s government — is taken out.

“Roti, kapda, makkan” (essentials) or Hindu pride – the trade-off is amongst us

Prime Minister Modi needs to take things in hand before the rot sets in deeper. Reigniting Hindu religious pride is far less important that keeping the hearth lit and supplied with food and essentials in 240 million Indian homes. This is beyond rhetoric.

Not quite the glorious path charted in 2014

The economic downturn has cannibalised the participation of women in the workforce — down to 26 per cent from 37 per cent in FY 2005. This hits at the meagre incomes of the bottom 40 per cent of households, where women have retreated into adding to the supply of surplus unpaid workers at home.

The Modi government started as a messiah for the jobless and the poor but got lost along the way in the multiple and often conflicting objectives it set for itself.

Poverty or its imminence, still haunts one third of Indians

First, we have forgotten what we are — a lower, middle income country with a per capita income lower than Southeast Asia and Sri Lanka in South Asia. Even this is nothing more than a statistical mirage. In 2016, nine per cent of Indians were poor (with incomes below $1.9 PPP per day) and an additional 19 per cent were vulnerable to lapse into poverty due to any of the multiple shocks — income (fewer days of work available), price (inflation) or emergencies (accidents, sickness or death) that the poor are exposed to. We are not a country which can sacrifice economic growth for any reason.

It’s a scarcity of jobs not skills

Second, even thought the popular narrative spun by big business is of unskilled workers constraining the economy, the real shortage is that of jobs — which pay at least as well, for skilled work, as is available in any of the countries to which skilled Indians migrate for work.

Poor industrial competitiveness inhibits more new “good” jobs

Third, the reason why more attractive jobs are not available is because industry — particularly medium and small industry — is not competitive. The revenue model of many such industries has collapsed with the shift to GST, which makes it crucially important to be part of the input tax chain.

There are reports that even here a “fake” challan industry has crept in which can make available a tax input challan without supplying any material for a fee. The proceeds input tax not paid is then available to the “buyer” to boost the bottom line. This might be an additional reason for the loss of buoyancy in GST revenues. But more likely, the slump in GST revenues reflects the real rate of growth being even lower than the four per cent expected in the third quarter of this fiscal.

Structural reforms politically tough in a declining economy

Fourth, the Indian-origin chief economist of the IMF, Gita Gopinath, on her recent visit to India, stuck to her institutional script, by flagging labour reforms as one of the pending reforms which could revive growth. What was left unsaid, however, was the need to ameliorate the potential pain that this would cause.  Genuine labour reform would involve raising the effective labour cost as the existing labour environmental, safety standards and adherence to social protection laws are widely flouted.

Also, two-thirds of formal industrial employment is in the public sector. Any change in the embedded entitlements would evoke a massive negative response from the government’s own “privileged” employees, which an embattled government is ill prepared to take on.

No option except “small steps”

Mother child

Fifth, suffice it to say that the “reform and grow” option is now unlikely to be available to this government. Slowing growth and the growing civil strife stoked by the government’s political agenda has unwittingly stiffened the back of the bedraggled Opposition parties who, scenting an opportunity, will increasingly band together to stymie the BJP’s efforts to regain the upper hand. This implies that any version of “big bang” reform, so dear to the investing public and stock markets, is now unlikely.

What remains is to revert to the hard slog of incremental reforms in areas of the greatest potential efficiency gains. While identifying where reform opportunities exist, it will be important to remember that the financial sector, because of its systemic impacts, is not a candidate for allowing inefficiency to persist.

Start at the very beginning – Revive “animal spirits” through an accommodative, discretionary process to support patient & productive capital

The woes of the financial sector emanate from sick industries which are unable to pay their debt. It would be best to roll out a non-judicial version of the 4R (recognise, restructure, resolve, reform) approach.

The government needs to start this massive corporate and business reform effort by accepting and insuring the concerned officials against the risk of failure, along the lines of what has been done to resolve the mountain of debt with the ILFS — dynamic private leadership shepherded by trusted government nominees to the new board of the company.

Finance minister Nirmala Sitharaman was possibly misunderstood when she stated recently that the debt of the medium and small companies would not be subjected to the same NPA regime as for large industry. This should not become a carte blanche for irresponsible lending under the guise of development. Nor should this become a cover for unsuccessful or wayward founders to evergreen their outstanding debt or get fresh loans.

Lift SMSEs out of the gloom cast by a cumbersome regulatory architecture


There are around 5,000 medium enterprises and around 300,000 small enterprises. Employment, including in the 6.3 million micro-enterprises, is 110 million. Stimulating those entities which have the chutzpah to compete and the necessary skill sets, with tech investment incentives, makes sense.

An accommodative, discretionary approach coupled with the dual intents of “not throwing good money after bad” and “not throwing the baby out with the bath water” must be strictly enforced to preserve productive employment and value addition.

From the author’s opinion piece in The Asian Age on December 25, 2019

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