On the Other Hand. Time to take the long view

By the time you read this, chances are that a new council of ministers would have taken office. Speculation is rife about who will be in the Cabinet and who will not, and which portfolio will go to whom. As of now, the only certainty is that outgoing Finance Minister Arun Jaitley will not be part of Modi Sarkar 2.0, since he has very publicly announced his decision to opt out on health grounds.

There is also no shortage of advice for the new government, both general and specific, on what it should or should not be doing when it gets down to business. Most of the advice has centred around the economy — on what is not working at the moment and what needs to be done to fix it.

It is another matter that most of the advisers — and I will include myself among them because I am shortly going to submit my two penn’orth — are in the happy position of not having to actually carry out their own advice.

Nevertheless, it is important for the powers that be to take some note of the plethora of suggestions floating around. After all, the economy is in a tight spot and it doesn’t look like the slowdown is ending anytime soon.

Of course, Prime Minister Modi can take some comfort from the fact that growth tends to slow down anytime regime change happens — even if, as is the case now, it is technically the same regime in a new avatar. According to a 2014 paper by Princeton University academics Brandice Canes-Wrone & C. Ponde de Leon, (Elections, Uncertainty, and Economic Outcomes) political and policy uncertainty introduced by elections and the prospect of regime change induces a sharp reduction in private investment, as well as “costly to undo” types of public investments. This in turn leads to a growth slowdown, which takes time to get reversed.

According to research by TAC Economics, this effect has been noticed in economies as disparate as Russia, Brazil, South Africa and Venezuela. As anybody who has been tracking the Indian economy will attest, this is very much true for India.

Private, public investment dip

India’s growth slowdown has been accentuated by a sharp slowdown in private investment, particularly over the past few quarters, and a noticeable slowdown in public infrastructure spending, particularly in the run-up to the elections, when the government moved towards more populistic measures like income support for farmers in a bid to stem perceived unhappiness in the rural sector, particularly agrarian distress.

Which means that the current slowdown will continue for at least two or more quarters before it bottoms out and growth rebounds again. In India’s case, thanks to the massive scale of the BJP’s victory, and the fact that it will now have the legislative muscle to push through any reforms it chooses, may shorten the slowdown cycle somewhat.

Continuity in regime and policy also means that the period of uncertainty reduces and both businesses and households can take long-term decisions like fresh investments in capacity creation, or, in the case of households, acquiring durable assets like housing.

There are, of course, a few things which can be done to speed this up. Domestic demand is still robust, businesses continue to be positive (the Purchase Managers Index is still positive) and hopefully, the much delayed insolvency proceedings in NCLT will finally start to free up sizeable liquidity for lenders, allowing banks to start lending more. Needless to say, any easing of monetary policy towards lower rates will only help.

The thing is, the government has little to do immediately to push any of these things. The teething delays at NCLT are nearly over, business optimism has only increased, as reflected by skyrocketing stock market indices, and the RBI is on a clear glide path towards lower rates. Yes, growth will slow down till well into the next fiscal, but after that, things are looking good.

Which brings me to an opportunity for Modi Sarkar 2.0 to do something different, without either risking medium-term economic growth or its political capital. If growth does get back to a higher trajectory, and all indicators point to the fact that short term cyclical shocks — the sharp slowdown in exports, the hit to government revenues due to demonetisation and GDP and also the mess in the banking sector — are more or less on the mend (oil prices remain the only joker in the pack), it can focus on something which it started to do in its first term, but sort of lost steam midway — bringing about social change.

Social sector thrust

Focusing on the UN Sustainable Development Goals would be a good place to start. India has not done too badly on many SDGs — absolute poverty has been eradicated (though one could argue that the bar, at $1.25 income per day, has been set too low); reversed the trend in prevalence of TB and HIV/AIDS, reversed the trend of rising CO2 emissions, and achieved near universal enrolment in primary education. We are also comfortably placed when it comes to servicing our debt and mobile telephony has made remarkable progress.

However, there are lag areas. Primarily, these relate to malnutrition and underweight children, high infant and maternal mortality rates (where we are behind even South Asian peers), gender equality and empowerment of women and women’s participation in the workforce, which has actually declined.

Notice they all fall in the traditionally neglected areas of public spending, namely health and education? This is perhaps the best time when the government can divert meaningful policy bandwidth and resources to address these issues.

Given the size of the mandate, it is a low risk, high (long-term) return game and a chance to prove that programmes like “Beti bachao, beti padhao” are more than mere slogans. It is a chance to take the long view.

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