An opportunity to transform economy

The clouds hanging over the global economy due to the US-China trade war and the slowing domestic economy make it imperative for the government to consider a sizeable stimulus in its first Budget

India has resoundingly re-elected the Narendra Modi-led National Democratic Alliance (NDA) for the next five years. Given its majority in Parliament, this will be a stable government with a clear mandate, and this provides the new government a historic opportunity to transform India’s economic landscape.

Clearly, the government has to continue with all the good work it has been doing over the past five years — reforming the banking sector, sharpening the roll-out of GST and investing in building core infrastructure. In addition, the economy has run into a bit of a soft patch which needs to be addressed immediately. The automobile sector is going through a slowdown, the aviation sector is in a difficult spot, and many corporations are clearly hesitant about making further investments. This has to be dealt with expeditiously. A few key actions by the government can put us on a more sustainable economic trajectory so that more Indians are able to reap the benefits of “achhe din”. 

The first task is reforming the financial sector including the banking space. Without robust banks, lending can’t be revived and without credit, investments in new projects will remain subdued. The government needs to quickly and massively recapitalise public sector banks so that they are able to lend more easily. The sentiment in the NBFC space, which was hurt with the unravelling of the IL&FS issue, has to be quickly addressed, perhaps with some sort of emergency line, notwithstanding the RBI’s likely reluctance in this regard. The RBI for its part, can definitely help by lowering the benchmark rate further, and also pumping more liquidity into the system similar to its two dollar-rupee swaps. With inflation below 3 per cent, there is absolutely no reason for the repo rate to be over 6 per cent, and for corporates to be borrowing at rates in excess of 10 per cent, which implies real rates of 7 per cent. No investment can happen at this rate of borrowing. It is an absolute imperative that the cost of capital be brought down quickly. 

Second, the indirect tax space saw the biggest reform since independence with the introduction of the GST. The next logical step will be to bring down the multiple tax slabs to, preferably, just one. This will not only make compliance easier, but also its enforcement. Similar is the case with the imposition of the long term capital gains tax which depresses capital markets sentiment but is not fully compensated for by an equivalent accretion in revenues.

A third important task for the government is to privatise public sector companies, including eventually the PSU banks. As the PM had said earlier, “the government has no business to be in business”. While it is good thinking to improve their health before a possible sell-off, today many are becoming a drag on the public exchequer. The government needs to sell many of these loss-making public sector units and use the money to shore up critical infrastructure like roads, power, railways, airports etc. This requires a philosophical change and it is imperative that this government takes such bold steps. 

Illustration by Binay Sinha

The fourth — and that brings me to a sector which is close to my heart — are the energy markets. In his previous term, Prime Minister Narendra Modi completed the commendable task of electrifying every single village in India under the Saubhagya scheme. As all households get connected and the GDP growth ratchets up, the hunger for electricity will only grow. However, this cannot be achieved unless the distribution system is reformed. Till discoms become financially viable they will not be able to pay for the power they buy nor will they be able to modernise their networks to handle increased loads.

The government’s electrification goals will also require a tremendous push from another key sector — renewables. India is now one of the leaders in clean energy generation but to keep the momentum going NDA 2.0 will need to set new targets beyond the existing 2022 targets of 175 GW, and bring in supportive policies. I would propose a renewable energy target of 250 GW for 2025, and 400 GW for 2030. This would imply that at least half of the new electricity capacity we need over the next 10 years will come from clean sources. This would buttress the PM’s global leadership on climate change, with India leading the way in tackling one of the most defining challenges facing humanity today.

Fifth, and finally, given the sluggishness in the Indian economy, and global headwinds that are likely to persist, the best course of action for the government may be a fiscal stimulus to revive flagging animal spirits. The clouds hanging over the global economy due to the US–China trade war and the slowing Indian economy make it imperative for the government to consider a sizeable stimulus in its first Budget. Fiscal deficit targets may be breached in the short term and purists will surely protest, but the longer-term benefits will outweigh the short-term disruption. A quick stimulus may also help in continuing one of the most important tasks before this government — the process of generating jobs for the millions of young Indians joining the work force.

The author is chairman and managing director, ReNew Power. Views are personal