The 17th Lok Sabha election results exhibited a strange dichotomy. PM Narendra Modi retained power with absolute majority for a second term, a feat that no other Prime Minister could achieve in last 50 years. Surprisingly this win comes in the backdrop of the said 45-year high unemployment in the country. Sensex surged with success of NDA in the Exit polls by a record 1400 points, but, witnessed dramatic fall of more than 1100 points as the expectations turned into reality. This reflects both aspiration as well as apprehension in the economy. How should the new government translate this precious political capital into desired economic capital enabling people of the country to shun the apprehension?
The first five-year NDA rule has been more on prudence, in fact, at the cost of economic growth. Bold reforms and steps have been undertaken during these five years; for instance, GST got implemented after a wait of 16 years; Insolvency and Bankruptcy Code instilled discipline among big borrowers to repay loans; demonetisation; changed several processes to improve rank in World Bank’s Ease of Doing Business from 142 in 2014 to 77 in 2019. Unfortunately, despite all these attempts, the economy has largely remained sluggish with the Index of Industrial Production (IIP) declining; current account deficit widening and unemployment rising. The Prime Minister certainly realises the gravity of the issue as during his first address, after the announcement of election results, expressed his desire to enhance economic growth as well as development.
The next five years need to focus on alleviating agrarian distress. The problem is beyond the solutions such as raising Minimum Support Price; NYAY offered by UPA; or PM Kisan Samman Nidhi implemented by NDA. This distress is not about managing shortage, in fact, it is about managing surplus.
With increased area under cultivation, improved monsoon and better irrigation facilities, Indian farmers realised a bumper crop. The Indian farmer is the second highest producer of fruits and vegetables globally after China, but India can’t export much due to lack of logistics support. Better roads and cold storage is required. Cold storages, in turn, require robust power supply. Power can be supplied if power distribution companies can buy adequate power at low cost. Power generation cost can be lowered if the power plants run at optimum capacity. To run at optimum capacity, Coal India needs to produce more coal; that too, efficiently.
Work has been begun to weed out the problems from this chain linking agrarian distress to coal production. Coal India production reached record high level of 607 MT in 2018-19. The UDAY scheme transferred debts of power distribution companies to state governments, thereby enabling more power purchase. Road laying has accelerated from 2 km per day in 2014 to 30 km per day. Government needs to emphasis even more on developing rural roads, storage facilities, electronic National Agricultural Market, irrigation facilities, crop insurance and cooperative farming.
The next five years also need to focus on job creation. In case of job creation too, there is actually a chain of problems as seen in case of farm distress. Jobs get created as GDP growth rises. GDP growth depends on consumption expenditure by households, plus investment expenditure by companies, plus government spending plus net of exports over imports.
Government Spending has already been on the higher side in the past five years. The export-import gap is widening due to global factors. So the new government needs to urgently motivate consumption and investment expenditures, but these cannot increase unless the real interest rate reduces.
Despite CPI Inflation in the country being 2.92 percent, the repo rate is 6 percent—implying more than 3 percent real rate of interest, which is too high to derive a competitive edge in the global market. High real interest rates attract foreign capital. This, in turn, makes the rupee stronger, reducing exports and inflating import bill. Current account deficit thus widens further.
Infrastructure companies get loans at 10 percent or so, i.e. paying more than 7 percent real interest rate. Why would they invest? Commercial banks can’t lower the interest rate as the borrowing cost is high—partly due to the NPAs, and partly due to the crowding out effect of government. The government pays around Rs 7 lakh crore interest payment, almost 25 percent of the Union Budget and almost 3.3 percent of the GDP. This needs to be lowered at highest priority.
There is a need to deepen the long-term debt market in India. Necessary reforms need to be brought to enable India take benefit of cheap global capital. Look at the bullet train project through Softbank of Japan—a loan of Rs 88,000 crore at 0.1 percent to be repaid over 50 years. Japan has a gross saving rate of around 28 percent of its near $5 trillion economy. Due to falling consumer demand, the investment has remained sluggish for several years in Japan. Hence the money is pretty cheap there, in fact, to the extent that there is a negative interest rate. Commercial banks have to pay interest to place surplus funds with the Bank of Japan. India must find ways to use this cheap foreign capital to get rid of its interest burden. These cheaper global funds should be used to develop deep bond market in the country to lower the interest rate which will boost both consumption expenditure of households as well as investment expenditure of the producers. As consumption and investment expenditure triggers, jobs will roll out.The author Dr VP Singh is a Professor and Program Director (PGDM) at Great Lakes Institute of Management, Gurgaon