Macroeconomic priorities for new govt

It will have to contend with some key challenges that do not figure in the election manifestos

With the National Democratic Alliance (NDA) government completing its five-year term and elections under way, it is a good time to outline what should be some of the macroeconomic priorities for the new government, whether NDA (as seems likely) or some Congress-centred coalition. The economic record of the last five years has been mixed, ending on a somewhat weak note and entailing substantial challenges for the incoming government, especially in the context of a weakening global economic environment.

Consider the following:

• Even the official 2011-12 base national income data (which has suffered its due share of professional questioning) show a growth slowdown in the past two years, with GDP growth decelerating from 8.2 per cent in 2016-17 to 7 per cent in 2018-19. Quarterly growth rates have come down from above 8 per cent in 2017-18 Q4 to 6.5 per cent in 2018-19 Q4. This slowdown is also reflected in high frequency information such as the Index of Industrial Production, trade statistics, corporate earnings results, Purchasing Managers’ Indices, major sectoral indicators and so forth. On current trends and policies, GDP growth could drop to 6-6.5 per cent in 2019-20. Main causes include: slowdown in global growth and trade; continued stagnation in India’s exports; weak private investment because of crowding out by high fiscal deficits (centre plus states running close to 7 per cent of GDP and a Public Sector Borrowing Rate of about 8.5 per cent ) and associated high real interest rates, balance sheet stresses as well as subdued “animal spirits”; persisting high stress in the financial system (including both banks and non-banks); and the lack of major reforms in agriculture, electric power, land and labour markets.

• On the plus side, the rate of headline CPI inflation has come down below 3 per cent, averaging about 3 per cent in 2018-19 (although “core inflation” has re­mained above 5 per cent), helped by moderate energy prices and declines in agricultural commodity prices.

• On the other hand, external finances are under stress, with the current account deficit in the balance of payments averaging an uncomfortable 2.6 per cent of GDP in April-December 2018. This is particularly worrisome against the background of merchandise exports suffering unprecedented stagnation around $300 billion a year since 2011-12, bringing the ratio to GDP down from 17 per cent in that year to about 12 per cent in 2018-19. Causes include:  an over-valued exchange rate; our failure to gain from relocation of low-end manufacturing from China (in sharp contrast to Vietnam and Bangladesh) or to successfully plug into global value chains; our ill-advised lurch towards higher customs duties in the past two years; persisting negative effects of demonetisation and GST transition (especially on small-scale exporters); and a still pervasive lack of “ease of doing business” in exporting.

• Above all, our employment situation has become quite dire because of long standing weaknesses in education, skilling and health, and an exceptionally anti-employment edifice of labour laws and regulations. Data from the as yet unreleased, “draft” Periodic Labour Force Survey conducted by the National Sample Survey Office in 2017-18 show: Unemployment above 6 per cent; youth (age 15-29) unemployment rates at dangerously high 27 per cent for urban females and 19 per cent for urban males; and labour participation rates (the proportion of working age population actually in the labour force) at below 50 per cent overall, a tragically low 23 per cent for females and a disastrous 16 per cent for female youth.

In sum, the new government will have to contend with slowing economic growth, weak private investment, anaemic exports and vulnerable external imbalances, a stressed financial system, mounting fiscal pr­e­ssures (including high government debt-to-GDP ratios) and an exceptionally bad employment situation.

In this context, it would be easy for any government to agree on the objectives of macroeconomic policy. It would want faster growth of GDP and employment, continuation of low consumer inflation, lower external deficits and a stronger financial system. The difficult challenge is in devising and implementing a consistent and politically acceptable set of policies to attain these objectives. Accordingly, I suggest the following priority areas for macroeconomic policy:

• Accelerate the growth of exports through: reduction in the current over-valuation of the rupee; reforms in GST systems and procedures to closely approximate the textbook zero-rating of exports; standstill (and then rollback) of customs duty increases, which typically operate as taxes on exports; proactive efforts to successfully finalise the Regional Comprehensive Economic Partnership agreement, which is necessary to secure our trading opportunities in fast growing Asian trade; and a serious efforts on trade facilitation. Faster export growth would be thrice-blessed by increases in GDP and employment (remember 35-40 per cent of our exports come from small-scale producers), reduction in our large trade and current account deficits, and deeper engagement with our trading partners.

• Reduce the central government’s fiscal and revenue deficits (yes, that old chestnut) through some difficult decisions on both the expenditure and revenue sides of the budget. That too will be thrice-blessed by lower real interest rates for medium- and long-term funds for private investment, higher public savings to accommodate a lower trade deficit in the national macro balance, and a gradual reduction in our near 70 per cent government debt-to-GDP ratio.

• Build on the major economic reforms of the past five years, notably the GST and the Insolvency and Bankruptcy Code (IBC). The GST rate structure needs to be simplified, perhaps with a modal rate of 15-16 per cent, a concessional rate of 8-10 per cent and a high rate around 25-30 per cent on “sin” items and a limited set of consumer luxuries. Exports need to be zero-rated effectively. The information technology system, registration/reporting requirements and compliance procedures need periodic review and reform. The IBC system is under constant and serious attacks from the promoter and other vested interests of delinquent firms. To preserve and strengthen this major reform will entail continuous review and improvements of the extant legislative and institutional framework.

• And if we are serious about reviving employment-intensive manufacturing, we have to undertake major reforms of labour and land laws. Our goal should be to compete effectively with Vietnam and Bangladesh to attract and nurture much more of the low-end, labour-using industries shifting out of China.

Illustration: Binay Sinha

These priorities may not figure much in election manifestos, but they remain critical for faster growth of national output and employment, the bedrock of sustained economic and social development.

The writer is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. 

Views are personal.