Roadblocks to growth

There can be no denying the emergence of two contrary narratives on the Indian economy — one that India will outpace China in the years to come and the other that points to a dismaying set of constraints, making one wonder whether the recovery will last. The euphoria is ebbing away, no matter what the growth numbers indicate. The Thomson Reuters/INSEAD survey on Asian business sentiment shows that confidence in India has slipped steeply over the last quarter. The Technical Advisory Committee on monetary policy recently noted that the “initial optimism regarding growth and investment was waning” thanks to subdued corporate earnings, deceleration in credit growth, falling exports and virtually no signs of a pick-up in investment. Corporates have been hit by poor rural demand, manifested by poor two-wheeler and tractor sales and the generally negative trend in consumer goods output. And now the Reserve Bank of India’s Financial Stability Report (FSR) tells us that the situation with respect to stressed assets has worsened over the last six months, which implies that private investment is unlikely to pick up in the near future. Key economy and employment drivers account for a huge share of these NPAs, such as infrastructure (29.8 per cent), power generation (16.1 per cent), iron and steel (10.2 per cent) and textiles (7.3 per cent). While an overhaul of bank governance, suggested by the FSR, can turn things around, it would be naïve to expect short-term results. Despite all exhortations, banks can be expected to remain risk-averse until their balance sheets look better. Therefore, the onus is on the government to keep the economy going.

The Centre has done well to identify high multiplier segments such as railways, affordable housing and urban infrastructure (creating smart cities and sprucing up existing ones) as growth engines. It needs to generate an additional ₹2.5 lakh crore per annum over the next five years (private investors being too debt-strapped to enter into PPPs) without compromising on the quality of spending on health, education and creation of rural assets. The time has come for revenue-led fiscal reforms; a tax to GDP ratio of barely 10 per cent cannot service investment needs of the economy. A sincere effort to uncover the black economy is called for. The fact that the FSR points to a drought of external capital for greenfield projects underscores the need to shore up domestic savings and government revenue.

A government that finds itself politically on the back foot should walk the talk on black money. Rather than lose its way in firefighting and publicity exercises, it should focus on mopping up resources for an investment push — and not leave that entirely to banks and India Inc which, as the FSR indicates, are not prepared to pick up the tab. The last thing we want is an economic emergency.

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