So now that the wine has run dry; the Christmas cake is mere crumbs and the New Year eve shenanigans are forgotten let’s get back to basics. What is 2020 going to be about?
In one word- tough except for large industry and private banks which shall clock handsome bottom lines, their bonus boosted employees and government servants, who are indexed against inflation. But that is just one third of Indians.
For the other two thirds – 160 million families, government will need to preserve informal income and employment by stepping up outlays on schemes – like NREGA and the original PM Kisan scheme for farms below 2 hectares – both of which are designed to transfer incomes to where they are most needed.
Multilateral finance can help
Long term domestic money is cheap and can get cheaper if the government ties up concessional funding on a never-before scale to enable it to fast forward much needed infrastructure investments.
Some in the BJP/RSS juggernaut and in the Left, view this with disfavor as it means extending a begging bowl to the West. Two points here. First false pride comes cheap for the proud but very expensive for their dependents – remember how Bollywood delighted in caricaturing proud zamindars or yore who lived in huge havelis but with no money to put food on the table. False pride in the government’s case will deeply hurt the more than 100 million families who survive on casual self- employment.
Others cite an excess of liquidity as the reason why more foreign money cannot help. They forget that multilateral funds shall not crowd out domestic liquidity for the private sector once investment revives.
Public Banks on a down cycle for a while
Banks have no takers for their cash because of the very high interest rates they charge for loans, despite a steep fall in the repo rate to 5.15 % and hopefully to 4.75 in February 2020. They can do so because they are an oligopoly. This is the cheapest way they can provide against 9 per cent of assets which remain non-performing.
This is despite the hand-out of Rs 3.5 trillion given to them by the government. More NPAs can be expected from the NBFCs, one third of whose assets are held by banks. Livelihood loans extended in loan melas during the recent elections have an unsustainably high proportion of NPAs. But their volume is small.
Private banks have it easy
Private banks comprise around two thirds of fresh lending now, though they hold only one third of bank assets. They compete against inefficient and stressed public banks and have no incentive to reduce interest rates and pare high margins.
Less government more governance – the Modi dream
The Modi governments had a dream of “less government and more governance”. This objective can be preserved if government is bold enough to contain employment in the public sector. In 2016-17 the average cost of a civilian Union government employee was Rs 0.5 million per year in pay and allowances. The pension burden of just under Rs 2 trillion is additional. Citizens wonder if they are getting a bang for their bucks.
The average pay can and should increase to around Rs 1 million per year to enhance the skills profile of government employees. The total expense can be contained at between Rs 3 to 4 trillion by changing the mix and steadily reducing the number of low skilled generalists who are 85 per cent of total government employment.
Direct income support measures a good short-term gambit to boost demand
Ramping up incomes is best done equitably and efficiently by scaling up the spend on NREGA from Rs 0.6 trillion this year to Rs 2 trillion in FY 2021 This would assure 200 days (instead of 100 days) of scarce work for around 22 million daily wage workers with an annual income of Rs 75,000 each. It also provides the most effective “minimum wage” for informal private employment.
Similarly scaling up the outlay for the PM Kisan Samman Yojna – but only for those with farms below 2 hectares – from Rs 0.75 trillion to Rs 2 trillion would benefit around 40 million farmer families with an annual transfer of Rs 60,000 per family.
The fiscal cost of these additional allocations is around 1.4 per cent of GDP. By directly enhancing consumption, demand will flare and benefit all producers, retailers and employees in the formal sector. But to keep the demand fires going, government must hike investments in infrastructure to halve the high logistics cost of 15 per cent for producers and expand primary health service and the Ayushman Insurance coverage, by spending an additional 1 per cent of GDP over last year.
Make GST rates reasonable and expand coverage to all industrial products
The more important thing is to cut nominal GST tax rates to reduce the entry level tax threshold for becoming “honest” tax paying producers in the medium and small scale-sector, where the tax buoyancy is currently missing. Large businesses have adjusted well and have been rewarded with handsome, indeed mouth-watering corporation tax reductions, boosting the bottom line particularly for new investments.
A fiscal boost can avoid this years revenue slump in FY 2021
Low growth levels however create unique problems like declining tax revenues. The shortfall against the targeted revenues in FY 2020 could be Rs 3 trillion (1.5 per cent of GDP). It is to avoid a similar outcome in FY 2021 that a big incremental fiscal boost amounting to 2.5 of GDP has become necessary.
FD below 6 per cent is bearable
This means targeting a fiscal deficit (FD) of 5.7 per cent of GDP for FY 2021 instead of the nominal target of 3.3 per cent in FY 2020. The UPA 2 government had a similar FD of 5.9 per cent in FY 2012. Admittedly, inflation will be stoked as previously. But its increase will be moderated in FY 2021 as there is existing surplus capacity in industry and in utilities to provide a supply response.
Bring INR to its real exchange rate
The final demand boost can be from exports (including aggressive agricultural exports) where the INR needs to depreciate to between Rs 75 to 80 against the basket of currencies. An INR close to its real rate will protect domestic manufacturers from imported competition; dissuade large industry from borrowing overseas and create domestic demand for the excess liquidity.
Keep the bureaucracy focused on growth not obstructive forensics
Finally pray that all remains well with the World and oil remains steady. Prime minister Modi is a lucky general and so this seems likely. It’s not all doom and gloom. But it is a lot of grunt work to get the bureaucratic plumbing to stand aside rather than impede growth. Cracking the whip can work in short spells.
Also available at TOI Blogs, January 3, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/keep-the-demand-fires-burning-in-2020/