The new NDA government will take charge in the last week ofMay 2019. The immediate task before the government is to prepare and presentthe Union budget. The budget exercise will be against the backdrop of a sub-par4 per cent inflation rate, a growth rate of a little higher than 7 per cent andCurrent Account Deficit (CAD) of slightly higher than 2 per cent. The economicscenario, thus, looks comfortable on the surface and the economy to some extentappears resilient. These numbers, however do not unfold the underlying story.Consider that
(a) agricultural growth has collapsed (3.8 per cent in firstadvance estimates, declining to 2.7 per cent in second advance estimates for FY2019 against 6.3 per cent in FY 17 and 5 per cent in FY 18);
(b) factory output contracted for the first time in 21months as reflected in the IIP numbers released in April 2019, with capitalgoods declining by as much as 8.7 per cent year-on-year; and
(c) the concerns arising out of the so-called twin balancesheet problem (balance sheet of banks and the corporates) remain largelyunresolved for a prolonged period of time.
Further, there are new downside risks of a delayed andbelow-normal monsoon, reversal of benigncrude oil prices and possibilities (indeed the certainty) of a fiscal slippage(deviation from the budgeted targets) because of hard budget constraintsarising out of downward rigidity in revenue expenditure. The burning problem ofjobs creation which was so much in focus during the election season is anotherthat needs focused attention.
We know that around 50 per cent of our population is engagedin the agriculture sector though its share in economic growth is much lower(14.3 per cent in FY 19) than that of industry (23.3 per cent) and the servicessector (62.4 per cent). Faster growth may come from industry and services. Butit is agri-growth and agri-productivity that drives economic growth at thegrassroots and provides long-term economic stability. This is because theemployment potential in agriculture is high so that the fruits of growth arespread out and leave their footprints across many other areas, leading to amore balanced growth that can benefit the largest numbers possible. Yet, thisis a sector that has received little attention. It remains largely at the mercyof the weather, suffers from poor infrastructure, lack of skills developmentand lack of institutional support to drive innovation.
In part, this is because agriculture is a State subject.Pushing through reforms in agriculture, in particular kick-starting ideas froma reliable cold chain to modern day storages or warehouses and in generallooking to give a boost to the rural economy will require a high level ofCentre-State cooperation. The new government in the interest of cooperativefiscal federalism should have a forum or institutional arrangement to addressthis. The institutional mechanism can be under the auspices of the NITI Aayogwith the Chief Ministers and members of the Union Cabinet as members under theChairmanship of the Prime Minister to push agricultural productivity,agricultural marketing and agricultural exports. This is easier said than donein the light of a political divide in the wake of a bitter election and a sharpsplit along party lines that seems only to have widened. There is a trust deficit looming large withmany regional leaders who are not a part of the NDA but are managing theStates. We’ll need a high amount of statesmanship to chart this road.
Enhancing employment in agriculture needs to be supplementedwith job creation in manufacturing and in the services sector. This has twoaspects. One is higher investment in physical and social infrastructure and theother is increasing efficiency through higher productivity. Given that thegovernment has little funds, the public private participation (PPP) model hasbeen institutionalised. The evidence, however, suggests that there has not beenvery encouraging progress in the PPP model, possibly because the Stategovernments are not fully involved. Again, the government may consider aninstitutional arrangement involving the private sector, State governments andthe Central government for policy-making, funding arrangement andimplementation of projects.
In the above context of fund raising for infrastructure, twoissues demand the attention of the government. One is the floating ofinfrastructure bonds by the private sector, with the government giving some taxconcessions. Another aspect is encouraging Foreign Direct Investment (FDI) byrelooking and revisiting the sectoral caps along with quality and efficientregulations.
Investment in the economy critically hinges on the savingsof the economy and the interest rate. These issues relate to the arena of the financial sector. Financialsector reform is a continuing process. Now that the elections are behind us andthe government will settle in for a five-year term, reforms must replacerhetoric. The government may revisit the shareholding pattern of public sectorbanks, nominee directors of government and RBI, issues related to NPAs andskill development in the financial sector in general and banking sector inparticular keeping in view global best practices. The fact remains that we’velearnt little from the NPA crisis – the crisis is still with us but banks havenot learnt to appraise loans better, practices to identify bad loans remainprimitive and the tendency to fill bank (and also PSU) boards with nomineesthat ask few questions and support little governance still remains. In thiscontext, it is important to point out that recently the RBI merged all itsthree supervisory departments into one – a meaningless merger unless theefficiency of supervision improves.
In sum, the new government will have to set the stage forfaster growth and this will require deft management of the long term with theshort term, along with carrying of different voices and ideas from across thepolitical spectrum – something that was particularly weak in the preceding fiveyears but must now pick up if the next five years are not to be lost.
(Pattnaik is a former Central banker and Rattanani is ajournalist with the foundation of The Billion Press. Both are faculty membersat SPJIMR.