A week ahead of the scheduled end of lockdown, India is faced with the crucial question of restarting the economy in the face of unprecedented destruction of the global value-chain by Covid-19. The scale of destruction can further rise, depending on the impact on the US.
Tasked with conducting policy-making in this evolving situation, the government is expected to keep faith on old warhorses ― agriculture and infrastructure ― for immediate revival of demand. As a longer-term strategy, it is likely to focus on manufacturing to strengthen domestic value-chain in select sectors.
The efficacy of the strategy will depend on scores of secondary sector reforms. The most important of these are finding a mechanism for fast-track implementation of infra projects and resolving issues with infrastructure finance, by reviving development finance institutions (DFI).
To keep the export economy going in the face of global recessionary trend, India should explore the opportunity of local currency-based trade with neighbours.
Local currency trade
The last point is crucial. Between 2013-14 and 2017-18, India’s total exports were down but exports to neighbours (SAARC plus Myanmar) climbed 30 per cent. Barring Pakistan, Sri Lanka and Myanmar, India’s trade with each neighbour witnessed a dramatic rise.
The trend largely remained unchaged in 2018-19. Over the last five years (FY15 to FY19), Nepal’s share in India’s total exports rose to 3.35 per cent from 1.47 per cent; Bangladesh to 2.79 per cent from 2.08 per cent; and Afghanistan to 0.22 per cent from 0.14 per cent.
To put it simply, at a time when exports of either raw material or finished goods to the rest of the world may suffer, neighbours can offer much-needed traction to the Indian economy. On the flipside, their purchasing power may be impacted by Covid-19.
Take the case of Bangladesh that depends on garments and remittances for forex earnings. Garment exports have already taken a $6-billion (18 per cent of annual revenue) hit and remittances are down by 12 per cent.
A possible solution to this problem is local currency-based trade as India did with Russia and lately with Iran. To the dissatisfaction of the Indian textile industry, it might increase imports from Bangladesh in the short run.
But considering India’s diversified export basket, net gains may be way larger. A bigger gain will come through long-term economic co-operation, as Bangladesh was dependent on China for raw materials.
Revive DFIs
The impact on global value chain will impact Indian industry, particularly the MSME sector, hard. The global auto sector is not expecting any revival in demand in the next six quarters and force majeures are declared indiscriminately. The wave is about to reach India.
A robust agri-economy and high infrastructure spend can act as a cushion in this situation, both by generating alternative employment and increasing spends on industrial and consumer goods.
However, the agri sector is suffering from scores of pending issues like the APMC Act (agriculture produce marketing committee), and poor agri-logistics, among others. It might be the right opportunity to iron out these issues.
Dismantling of DFIs during Vajpayee-rule didn’t augur well for India which is still scrambling for the right model to finance infrastructure projects, where the gestation period is too long for the comfort of banks. The results of lack of clarity in finance were clear during the recent NBFC crisis.
To ensure quick and heavy spend in infrastructure, the government should ready fully-funded DFIs, which can raise additional capital through issue of bonds.
Due regulatory tweaking may find banks subscribing to those bonds. A spin-off of this initiative is realising the long-pending dream of developing the domestic bond market.
Fast-track mechanism
Finance is not the only hurdle for implementing infra projects. A bigger problem is long and cumbersome procedures that needs to negotiate myriad laws and clearances. However, the most important of all is the long bureaucratic delays.
From the DPR stage, it takes a minimum three months to award a contract. This is followed by all those regulatory and legal clearances from various State and Central authorities, which may take up to two years.
Can India wait for so long? The answer is a strict ‘No’. For immediate revival, we need to get going in six months.
How the government will create such a mechanism is a million-dollar question. One possible solution is involving state governments in project implementation and creating due legal framework which will limit the scope of bureaucratic and judicial intervention.
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