R Srinivasan

At the edge of the precipice

Updated on: Jan 22, 2014

The recession has gone from apprehension to reality. But where is the policy response?

Just how bad is fiscal 2013-14 going to be for the economy? Since the potential outcome has been telegraphed well in advance by all leading indicators, there are no prizes for guessing the answer: terrible. The Reserve Bank of India — usually a more sober and reliable forecaster of economic numbers than the Finance Ministry — has already scaled back its growth prediction to 5 per cent at its last quarterly review, and may well do so again at the next one scheduled for the end of the month.

That’s because the one factor it was banking on to perhaps add some zing to the growth numbers — the strong, double digit growth in exports seen in the previous quarter — has also fizzled out.

As for manufacturing, 2013-14 will be its annus horribilis , with manufacturing growth likely to be either zero or negative for the full year. The recessionary mindset which the government was blaming for the lack of uptick in investment, output and consumption, has just turned out to be the real thing, an actual recession.

Of course, one could argue that it is contradictory to talk of a recession when the economy is still growing. Overall GDP growth, even in the pessimistic forecasts, is pegged at upwards of 4.5 per cent for the year.

Feel the pull?

But a recession exists if you and I are experiencing one. Job growth has plummeted steeply. Most manufacturers — from car makers to computer manufacturers to television and telephone makers — are struggling to find more customers. And the government’s revenue collections from both direct and indirect taxes is way below estimates. Agriculture is admittedly having a record year, and agricultural incomes are going up, but one swallow does not a summer make. For everybody else, this has been a very grim year.

And the trouble is, it doesn’t look like the government of the day will be able to do anything about it anytime soon. India, unlike the US, does not face the prospect of falling off a ‘fiscal cliff’. Unlike the US, we treat the government — and the government’s business — with far more deference.

So, regardless of whether we have a lame duck government, as we have right now, unable or unwilling to even summon a session of Parliament to push through urgently needed legislation, or an actual caretaker government, as will be the case after the House gets prorogued before the upcoming general elections, the business of government will carry on. All of government’s ongoing activities will carry on, thanks to a vote on account which will be dutifully passed by all the political parties, in order to uphold ‘democratic convention’ even though the same parties had no compunctions about throwing the same democratic conventions to the winds by reducing the last year and a half of the current Parliament’s session to exercises in competitive lung power and obstructionism.

Manufacturing stalemate

The trouble is, even if the current government sheds its inertia — as the new Environment Minister Veerappa Moily did with his file clearing spree — and decides to throw convention out of the window and go ahead with policy initiatives with its last Budget, this is unlikely to change anything for manufacturing.

India’s manufacturing crisis has been precipitated by problems and issues which cannot be solved by any last-minute burst of energy, or even implementing long-pending reforms such as the new Direct Taxes Code or the Goods and Services Tax. Fundamentally, they drill down to three things: a profound infrastructure gap, a breakdown in delivery of even the make-do version of governance that we have, and an inability of the political class to re-imagine possibilities and alternative policy priorities.

This, of course, is not a new discovery. Policymakers at the highest level have been aware of this for some time. In a paper outlining strategies and approaches to accelerate the growth of manufacturing in India during the 12th Plan and beyond, the Planning Commission observed: “Poor implementation is a root cause for India’s poor performance in Manufacturing. In China, and Japan and Germany — countries that have developed very competitive manufacturing sectors — things get done. In contrast, things do not get done as certainly in India. Policies, even well conceived ones, are often not implemented. Projects, albeit well intended, do not get completed on time.”

The Steering Committee for preparing the Commission’s manufacturing plan for India drilled down further to look for the root causes for poor implementation of projects and policies. It settled on two: “Inadequate consensus amongst stakeholders for policy changes, and very poor coordination amongst agencies in execution.”

Notes from the report

There are other interesting nuggets in the report, including the finding that more than three-quarters of the administrative and policy roadblocks that hamper manufacturing are actually generated at the state level and not the Centre. That is one of the reasons why even an attempt to change the policy paradigm at the Central level — like opening up multi-brand retail to foreign investment — fails to get the desired outcome of foreign investors beating a path to India’s door to invest in big box retail.

On the issue of FDI in retail, for instance, both the parties expected to have an impact on the outcome, the BJP — and more importantly, the ‘business friendly’ Narendra Modi — and the Aam Aadmi Party, have already given a thumbs down to the idea. And now ask yourselves the question: Will even a decisive mandate in the next elections lead to greater consensus among stakeholders for policy changes?

That’s not all. There does appear to be some sort of consensus on policy change — but in the opposite direction from what the Planning Commission probably had in mind. The AAP’s populistic and economically irrational halving of power tariffs in Delhi has spurred competitive measures in other states, ruled by the Congress. And what the Congress wants to take credit for in the elections would surely be something the BJP would want in on. When it comes to diving off a cliff, there is no lack of consensus!

Published on January 22, 2014

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