Black and white

India must build on improved macroeconomic stability

There is virtually no debate that the Indian economy was in a difficult spot by 2013-14, the last year of the United Progressive Alliance (UPA) government, and things have improved since. Thus, the White Paper, presented by the Union government last week, has limited policy relevance. India’s problems were exposed when the US Federal Reserve, after years of quantitative easing, hinted at reducing the pace of monetary easing in the summer of 2013. A significant widening of the fiscal deficit after the global financial crisis led to higher inflation and a current account deficit that was running close to 5 per cent of gross domestic product (GDP) in 2012-13. Besides, in a bid to revive growth, banks were encouraged to lend, often to unsustainable projects, which resulted in high levels of non-performing assets. Much of this has been recognised over the years.

Meanwhile, the government of the day was embroiled in several corruption and other scandals. The Supreme Court, for instance, in 2012 cancelled 122 telecom licences. While the judgment is still debated, it did reflect the political and business environment of that time. Confronted by problems from all sides, a coalition government couldn’t take tough decisions. It did try to control the damage through a change of the guard in the Ministry of Finance in 2012, but by then it was too late. The US Federal Reserve’s hint of tapering bond purchases led to panic in global financial markets — popularly known as the “taper tantrum” episode — and drove India to a near currency crisis. Things began to stabilise after the leadership change at the Reserve Bank of India (RBI) in September 2013. The RBI announced plans, among others, to shore up foreign exchange reserves, including through borrowing from non-resident Indians, strengthening the monetary policy framework to address inflation, and improving the recovery of loans.

To its credit, the National Democratic Alliance (NDA) government prioritised the task of strengthening macroeconomic stability. Along with improving the fiscal position, it made two very important decisions. First, the adoption of flexible inflation targeting sent a strong signal regarding policy commitment to price stability. Second, the implementation of the Insolvency and Bankruptcy Code (IBC) tilted the balance of power in favour of lenders. For the first time, promoters of even large firms faced the risk of losing control. The IBC, to be sure, remains a work in progress because it’s taking considerably longer to resolve bankruptcies. Nonetheless, it has improved credit culture and, along with substantial capital infusion in public-sector banks, helped address the twin balance sheet problem. The NDA government has implemented various reforms to increase the ease of doing business.

Importantly, course correction by the RBI in terms of managing currency and foreign-exchange reserves also helped a great deal in strengthening macroeconomic stability. Yet, despite undisputed improvement on the macroeconomic front over the last decade, attaining higher sustainable growth will require sustained policy interventions. For instance, though largely because of the pandemic, India’s public debt and general government deficit remain elevated. India has struggled to improve the tax-to-GDP ratio significantly and the implementation of the goods and services tax — another big reform — also remains a work in progress. In sum, while it was difficult to take tough decisions under the large UPA coalition, a politically stable NDA would have benefited from a more consultative approach. It would have helped in taking forward reforms in land acquisition and farm sector, for instance. Professional consultation on trade would have nudged policy against higher tariffs.