Low-cost solutions for the current slowdown

Subir Roy | Updated on September 19, 2019 Published on September 19, 2019

Rising oil prices could hold up fund-based measures. Policymakers should approach the various crises from a different angle

The economy has not faced in a decade — from around the 2008 global financial crisis and its aftermath — the kind of headwinds it is confronting now. The first symptom was visible over five years ago, when exports began to stagnate at, a time when the global economy was pulling its weight.

More recently has come the GDP growth slowdown, just when the country’s leaders were in a gung-ho about India becoming a $5-trillion economy. The fact that officialdom had no foreboding of a slowdown has now been admitted by the central bank governor. So efforts will first have to be made to find what went wrong before devising measures to set things right.

This exercise will be further complicated by the fact that the GDP figures themselves may be inaccurate. You need one set of policies to boost the growth rate from 5 per cent and a different set of policies and emphasis to address a near-crisis situation of 2-3 per cent growth.

On top of the twin slowdowns, the serious prospects of a sharp rise in global energy prices emerged after the attack on Saudi Arabia’s oil facilities. If things do not return to normal soon, domestic energy prices will go up significantly (they have just been upped already by 14-15 paise per litre).

Ease of doing business

So what kind of a policy regime will be needed to address these headwinds? The best thing policymakers can do, and it is not a fund-based measure, is to look all around to improve the ease of doing business, keeping in mind the way progress on this front was celebrated not so long ago.

A small beginning has been made by the Finance Minister assuring urgent efforts to reduce the turnaround time at Indian ports and airports, so that they conform to international best practices. Otherwise, Indian exporters cannot be efficient participants in global value chains.

From looking outwards, if we turn around a full 180 degrees, we will find that the Indian farmer can hugely benefit if instead of having to rely on government-supported prices for his produce, he is able to sell it to whomever he chooses and thus get a better price from the market itself. The Centre and States have to put their heads together to remove all impediments in the way of the country becoming an integrated market for agricultural produce, which may then be traded across the border easily. This solution may even save the government some price support spending.

When the corporate sector sees a business opportunity for itself by, for example, looking at the currently prevailing farm-to-fork mark-up for food, it will be ready to invest in the supply chain by laying out the infrastructure (cold chain, godowns, etc) and owning it. Again, there is little need for government spending and it can be a life changer for the farmer with a stagnating income.

Better incomes for farmers will boost demand for consumer goods and remove the cloud currently hanging over FMCG companies, which are seeing a fall in demand for even the cheapest biscuits. Just a small rise in demand from the 50 per cent of Indians living off agriculture (better price realisation by farmers will lead to better farm wages) will do much to address the slack in consumer demand.

Policy tweaks

In boosting consumer demand, the government should go all out to make the rural employment guarantee scheme better. To take one example, cashew-nut processing farms are currently facing challenges from two quarters — price competition from imported nuts mechanically processed and higher wages to be on par with the employment guarantee scheme. If the scheme works better, it will produce enormous welfare gains (improve the quality of spending) at only marginally higher government expenditure, in relation to total expenditure.

Another small-ticket item which can have a large impact on the emerging water famine in India is promoting small irrigation works like excavation of local ponds and construction of small bandhs, which will harvest rain water and recharge groundwater. Enhanced micro watershed management will boost the rain-fed farm sector, home to the poorest who depend on the yearly monsoon without any backup for a drought year.

If we again turn our heads and look at the financial sector comprising banks and non-banking finance companies (NBFCs), addressing their liquidity needs and helping individual NBFCs avoid default will boost business across sectors which were hurt by credit drying up post the IL&FS collapse. Recapitalisation of banks need not fully impact the fiscal arithmetic, and more liquidity to NBFCs can come from an easier market and some easing of rules by the monetary authorities.

The entire discussion has been focussed on ensuring that the fiscal burden does not become onerous. Until the oil disruption, some loosening of fiscal purse strings could have been easily considered as inflation had been low. But if oil global prices keep ruling high leading domestic prices to be raised significantly, then there will be impact on inflation, and the space for fiscal action will be reduced.

The writer is a senior journalist

Published on September 19, 2019
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