T N Ninan: Beyond the numbers

The govt should be using the time it still has to address the structural reform issues it has ducked these last three years

When the Indian scene is viewed through the prism of macro-economic data, the economy gives every impression of being in a sweet spot. Inflation is low, the central fiscal deficit has been falling steadily, and the external account is comfortably balanced. Growth could be better, especially after the slowdown last year, but most forecasts suggest a continued GDP growth rate of more than 7 per cent because of the fading effects of demonetisation, the expectation of another good monsoon, and improvement in the global economy which finds reflection in better export figures for India. The political complement to the positive economic situation is the existence of a secure and energetic government in New Delhi, buoyed as it must be by the expectation that it is likely to win re-election in 2019. So what’s to worry?

Plenty, it would seem. For one thing, parts of the country’s political heartland give the impression of being seething cauldrons of unrest and dissatisfaction. Agitating farmers have turned violent, wanting debt write-offs among other things. Caste groups like the Jats, Gujjars and Patidars agitate periodically for inclusion in reserved categories (signalling the lack of jobs), while new outfits like the Bhim army fight for civil rights, usually in the context of exacerbating caste conflicts. Add to these the unchecked vigilante action on one or other pretext, and further alienation and fresh violence in the Kashmir valley. The country can boast of economic stability and creditable growth rates, but it is evident that a range of problems lurk beneath the surface, waiting to erupt.

Some problems may get worse before they get better, like the stubborn one facing banks. The shortage of demand for power and the growing competitiveness of renewable energy have made the problem of unviable thermal stations more acute. Meanwhile, the sharp drop in telecom tariffs has pushed most telecom operators into the red. Power and telecom companies have enormous levels of debt, totalling more than 6 per cent of bank assets, and pose a fresh worry for banks already weighed down by bad debt on their books. The loan write-offs being announced by state governments will not affect banks because state governments will pay up, but the states’ growing fiscal deficits, already flagged by the Reserve Bank as a matter of concern, will get noticeably worse. And unless the government retraces its steps on the cattle trade, the dairying business will face viability challenges more significant in scale than the setbacks to the leather and meat export businesses.

That will present one more aggravation for farmers already on the warpath. Among the many reasons for this, one must be that the implications of the success in diversifying Indian agriculture have not been thought through. Horticulture output (including onions and potatoes) has grown dramatically over the years—without any assurance of the predictability or stability to market prices that has been ensured for wheat and rice (which, incidentally, produces less tonnage now than horticulture). Consequently, good harvests often mean grower unhappiness, as a spurt in supplies only drives down prices. The dramatic surge in the production of pulses this year is another good example—a spike of more than a third in output has sent prices crashing. Growers have earned less this last year than in the previous year’s drought. The State Bank of India’s research team has put out numbers showing how the prices of key agricultural products are lower than the average of the last three years. The farmer unrest should have been expected.

On other fronts, the problem clearly is the lack of growth that is fast enough—with its attendant benefits of job creation, better use of production capacities leading to fresh investment, sectoral upticks that help corporate profits and therefore improve debt profiles; all of these are lacking today. Seven per cent annual economic growth is not good enough for India at its present juncture, and the government should be using the time it still has to address the structural reform issues that it has ducked these last three years.