Structural reforms must continue

The Indian economy is still a bright spot with its macroeconomic fundamentals looking fairly sound after the recent fall in international crude oil prices. India’s external current account deficit may remain around 2.5 per cent of GDP in 2018-19. The rupee, which depreciated to ₹75 against the US dollar in October 2018, is hovering around ₹70 now. Foreign institutional investors (FIIs) seem to have reposed their faith in India by returning to both the debt and equity segments. CPI inflation at 2.3 per cent in November 2018 is well below the 4 per cent target. The Centre is hopeful of achieving the fiscal deficit target of 3.3 per cent of GDP in 2018-19, notwithstanding shortfall in revenue collections under GST and disinvestment.

Barring crude oil prices, other global headwinds remain more or less unchanged. There is no appreciable decline in the trade war between the US and China. Although recovery in the US economy has slowed down, the unemployment rate continues to remain below 4 per cent. Recovery in other major economies is showing distinct signs of weakness. Capital flows to emerging economies are volatile. Global trade volume growth is unlikely to be robust in 2019.

In the domestic front, twin balance-sheet problem remains largely unresolved despite stringent actions being taken under the Insolvency and Bankruptcy Code. Although there is early sign of decimal decline in NPA ratio, the balance sheet of public sector banks remains distinctly weak.

Determination to resolve the NPA problem seems to be weakening in the election year. The RBI has come out with a debt- restructuring programme for MSMEs for borrowings up to ₹25 crore. This is precisely the same mistake committed by the central bank in the aftermath of the global financial crisis (GFC), which perpetuated large-scale ever-greening of borrowal accounts.

Instead of having blanket restructuring, it is better to distinguish between wilful defaulters and those who have defaulted due to adverse macroeconomic events. Even if each bank has been asked to formulate a board approved policy for MSME debt restructuring, the RBI’s regulatory forbearance may be misused.

Though India is the fastest growing major economy of the world, it has an enduring unemployment problem. Jobless growth is a global phenomenon, particularly after the GFC. India is no exception. Innovations in the job market are so rapid and disruptive that workers hardly get enough time to re-skill themselves to get absorbed in new jobs.

Skill development initiatives in India are yet to make a big dent in resolving the unemployment problem. Educational institutions take time to change their curricula to provide the right kind of technical skill required by the industry.

In the age of outsourcing, it is the skill and resulting output that sells, not the labour hours. Moreover, we do not have reliable data on self-employment and scores of people are working in different platforms on a temporary basis. The strategy should be to reassess the shortage of skilled manpower in each sector and re-skill unemployed people at various levels for gainful employment.

Boosting GDP

When global headwinds are strong, it would be difficult for India’s GDP to grow above 7.5 per cent. Although domestic capital formation seems to have looked up during the recent period, 8 per cent plus GDP growth requires higher level of investment. Despite several structural reforms having been initiated recently, India’s productivity growth has been unimpressive. It is, therefore, necessary to continue structural reforms in each sector consistent with the national objective of achieving over 8 per cent growth per year for a few decades.

Agrarian distress needs a long-term solution, which involves investment in irrigation, an efficient value chain for marketing, agro-based industries in rural areas rather than loan waivers/cash transfer, besides interest subvention, hike in procurement prices and input subsidy. There is a need to review as to why some good initiatives like crop insurance and E-Nam are not picking up.

Currently, the RBI is in an enviable position, with the economy witnessing high growth and low inflation. Upside risks to inflation emerging from crude oil prices have been abated. Sticking to the monetary policy stance of ‘calibrated tightening’ is not desirable. There is scope for reducing India’s policy rate, which is one of the highest among its peer group. This would provide much needed impetus to growth, which has been predicted to moderate in the second half of 2018-19.

The fear of rapid normalisation of monetary policy by the US Fed has declined as the Fed is expected to hike policy rate twice in 2019 as against four times in 2018. Hence, the Monetary Policy Committee should not lose the opportunity to cut the repo rate by 25 basis points and revert to neutral monetary policy stance in February.

Any deviation from structural reforms for short-term electoral gains may squander away the hard-earned improvement in India’s sovereign rating, ease of doing business and, above all, India being a preferred destination attracting the highest level of foreign direct investment.

The writer is a Visiting Fellow at IGIDR.

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