Narendra Modi, the leader of the right-wing Bharatiya Janata Party, is all set to become India’s next prime minister, but he inherits an economy in crisis – the winner’s curse.
The GDP growth is the lowest in a decade. Continued price rise during the last 10 years of the government led by the Congress party reduced disposable income and job growth dried up substantially. Moreover, the government’s public finances (fiscal situation) are under pressure with expenditure outpacing revenues by a wide margin.
Here are some of the economic challenges that India’s new Prime Minister faces.
Reviving economic growth: India’s GDP growth rate has dipped to less than five percent in the last two years from nearly eight percent in the first eight years of the outgoing government. Moreover, large sections of
the population have been left out from the decade-old growth story. Poverty rankles deep and economic distress has forced millions to move to cities where they ended up in shanty towns. Apart from the global slowdown, lack of economic reforms and corruption were the main reasons for the dip in the GDP growth. Government’s lack of clarity on reforms impacted investments from the private sector, which has gone into a shell.
The new prime minister might need to initiate some projects first, but the economy’s ability to spend on public expenditure plans is limited due to financial constraints. He might start off by clearing some of the stalled projects quickly. Given the limited supply of capital available domestically, bringing in long-duration foreign capital into projects is imperative. But for this to happen, policies/reform decisions across the sectors have to be taken swiftly.
Keeping public finances in the check: The outgoing United Progressive Alliance government has brought public finances under control by cutting expenditure plans, rolling over subsidies to the next year and forcing dividends from public sector companies. These are not sustainable, and it hampers the ability of the new prime minister to spend on productive projects. The BJP has promised to provide access to electricity, sanitation, drinking water, education, healthcare and housing for all. These social-welfare plans can put public finances under pressure.
Modi has to first push for social-welfare plans that create assets for future growth. But till development plans bear fruit, social-welfare plans are important since there are sections in rural/low-income urban community who have not benefited from the economic growth. The BJP leader faces a dilemma whether to reduce subsidies for fuel, fertiliser etc. If he does, it would reduce wasteful expenses and free up money for productive projects such as infrastructure, education, public facilities, low-cost housing schemes, etc.
But cutting subsidies would raise prices (and inflation). In public revenues, the new government needs to increase tax compliance with a progressive and rationalised tax structure, in order to bring in further tax revenues.
Countering price-rise and supporting agriculture infrastructure: Price rise has been the biggest enemy of the average Indian. Factors include crude oil and commodity prices, inefficient infrastructure spoiling food products, changes in diet towards protein items, better cereals, etc. In all this, the food segment has possibly been a major contributor towards inflation. Weather uncertainties such as El Nino continue to keep crop output under pressure in the current year, and any shortfall in production would hike prices and push up inflation yet again.
The country’s central bank has kept the policy rates (at which it lends to commercial banks) high to counter inflation. As a result, the rates at which banks lend further to the industry are also at the upper end. The new government has to bring in measures to tackle price rise, so that inflation and interest rates eventually come down.
Given that food has been a decisive component, possible measures include reforms in agriculture infrastructure, such as expanding irrigation network to reduce dependence on monsoon, storage/warehousing facilities for food products to reduce spoilage, agriculture-rail network to speed-up supply, agro-processing for value-addition activities, countering hoarding and black marketing and using technology for faster dissemination of actual market prices.
Boosting jobs and skill-creation: If the new prime minister can initiate plans which invest into skill-creation, education and entrepreneurship, that would go a long way to boost income opportunities, reducing the need for social-welfare plans in the first place. Apart from improving university and school infrastructure, job creation also requires skill-creation, training for vocational employment and scholarships.
Skill-imparting needs to look at small-scale industries and labour-intensive sectors, which can address employment and economic distress-led migration. Apart from creating a conducive entrepreneurship ecosystem through access to capital, information, infrastructure and skills, the new leader can also set up business incubation support, given that India is still a country where entrepreneurship is viewed socially as a career of last-resort.
A push towards entrepreneurship and skill creation is critical for a country of 1.2 billion people, of which almost 12 million are estimated to enter the job market each year.
Making industrial, infrastructure and export growth a priority: India’s segment-wise GDP shows that the Industry segment has been the main drag. Delays in policies, environment and regulatory clearances and high borrowing costs slowed down investments by companies.
A number of projects are currently stalled as approvals slowed. In this environment, it is imperative to enable a single-window clearance system for faster decisions and time-bound clearances for projects. Apart from this, investments into logistics, road/rail connectivity and freight railway lines would also help create an enabling environment for industrial growth.
The new government needs to make industrial corridors (areas dedicated for large-scale industrial plants and townships with well-linked connectivity to ports, cities and raw material sites) a priority as these offer significant incentives for large-scale investments. This means addressing sensitive issues like land acquisition and compensation.
Industrial focus includes looking at value-addition, such that India can produce something in the eventual value-chain of a product even if it is not capable of producing the final product itself. This would help make India a hub in the global manufacturing process. India has narrowed its gap between imports and exports by cutting imports, while export growth is far from achieved.
The new leader needs to give impetus to “India-roadshows”, under which the country conducts promotion of Indian products and services in various countries to showcase domestic products, and thus win new export markets for itself. Export growth boils down to sectors where India holds competitive advantages, since other countries would not be able to take away market-share even if their currencies move favourably to the US dollar.
In conclusion, the economic challenges confronting the new prime minister are immense; however clarity on the policy and reforms front along with faster decisions would help initiate action that would help boost economic output.
Image Courtesy: EPA & Al Jazeera
Originally published here – http://www.aljazeera.com/indepth/opinion/2014/05/economic-challenges-india-next-2014518123636444401.html