Events & Issues

New Delhi, 11 October 2017

Economic Revival

DISCARD TOP-DOWN APPROACH

By Dhurjati Mukherjee

Suddenly there is a great momentum for the need to revive the economy. After recent criticism by former finance minister Yashwant Sinha, of the government’s failure on the economic front, Prime Minister Modi has tried to highlight NDA’s achievements and trash the analysis as totally unfounded. However, Modi’s defence hasn’t been convincing as the RBI’s projection of 6.7 per cent GDP growth in the current fiscal may not be a reality.

There are frequent discussions by economists and political analysts on TV for its revival but most of them, who are divorced from grass-root reality, fail to assess the situation. Economic revival is a pet subject for debate over years and these so-called experts, who mostly support the government in power, find ways and means to paint a rosy picture in the coming years. The ADB forecast of 7 per cent growth in this financial year may also not become a reality.

It is understood that the government plans to spend Rs 50,000 crores ($7.7 billion) to halt the economic slowdown. Though fiscal deficit may increase to 3.7 per of GDP, this is indeed a judicious decision to increase demand creation. As private sector spending is not up to the mark and may not be so in this fiscal, if the public sector is aggressive in setting up projects, demand would steadily go up.

For example, a railway project or a port generates orders for steel, cement and machinery which creates a derived demand in a host of sectors and helps the private sector rev up growth. Though there has been some increase in infrastructure spending in the current fiscal, the present spending may give the much needed booster to the languishing economy. But projects have to be well planned so that these are completed, preferable within a year or so.

However, efforts would also have to be made to revive private sector investment and improve the capacity of the banking system to support growth, as stated by Finance Minister Jaitley at the IBA’s AGM in Mumbai recently. “How do you maintain the balancing act between continuing to spend in an economy, supporting our banks and maintaining the standards of fiscal prudence, he pondered.

The government is committed to recapitalise State-run banks by Rs 10,000 crores during this fiscal through budgetary allocations. Officials said there is thinking that another Rs 20,000-30,000 crores may be raised through off budget funds subscribed by financial institutions, including foreign lenders. Though capitalisation of PSU banks remains a concern, adequate funds would be made available to them. It is understood that the proposed capitalisation of bonds with government guarantee would be made after discussions with the RBI.

It may be pertinent to mention here the Congress’ allegation that NPAs, which was Rs 2.5 lakh crores during the UPA’s term is now Rs 8.8 lakh crores, thus blaming the government for mismanaging the financial sector.

The second quarter results may not be much better as floods in some areas and drought in around 220 districts has thrown the agricultural sector into a crisis. Reports indicate that kharif production may decline by around 3 per cent compared to last year due to floods and deficit rainfall. But more than productivity increase, the cost of agricultural production has increased considerably, specially in the past 2-3 years, thereby necessitating a revision of MSP. If agricultural labourers migrate to cities in search of employment, as a major section is presently doing, urban chaos would accentuate further. 

One may refer to well-known economist Prof. Michael Lipton, formerly of Sussex University, who in his famous book ‘Why Poor People Stay Poor?’ observed that subsidy is being given to the urban middle and upper class at the cost of the rural poor. If petrol diesel and cooking gas prices increase, even when international prices are down and there are protests by opposition parties, why should rice or wheat prices be artificially not allowed to increase, directly affecting the farming community?

A section of experts, who are always against loan waivers, would see this as an eye-wash, as regards UP is concerned. In all, 6000 farmers got a waiver between Re 1 and Rs 10; 5000 farmers between Rs 10 and Rs 100 and 4000 between Rs 100 and Rs 1000. Hoodwinking the poor wouldn’t take the UP government or any other government any far.

The most important challenge before the government is lack of job creation and rising unemployment and underemployment. It is estimated that around 25,000 to 30,000 enter the work force each day but only 450-odd find employment. This growing job crisis is the key to Modi’s promise of economic revival. Various factors including the quest for automation, stagnancy in manufacturing and an overall critical situation for micro and small enterprises has led to reduced jobs. Even the tag ‘jobless growth’ may not be applicable in the present situation as growth has shown a downward trend.

Meanwhile, the textile industry, which is a massive job generating sector, is suffering due to distorted GST structure. So is the case with MSMEs, very small traders and businesses. Pesticides, fertilisers, tractors and agricultural equipments, cold storage and warehouse construction are being taxed under GST. These need to be corrected immediately for the economy to revive.

A certain section of experts are of the opinion that when GDP growth rises, there would be a certain amount of job creation and vice versa. One can debate as to what would be the exact impact of job creation but the number of around a million jobs per 1 per cent of GDP growth looks reasonable given that 12-13 million people enter the workforce every year. Thus, the challenge is to create jobs fast enough and economic growth alone is obviously not enough. There is need to re-skill people and ensure there is empathy and dignity of labour so that not everyone wants to become an engineer or an MBA.

In this somewhat critical situation, the rural infrastructure has to be revitalised and more money spent on infrastructure, both physical and social. In the physical sphere, apart from roads, construction of cold chains, which are presently much less than demand, is imperative for to prevent wastage of food grains while health and education should be the focus of attention where lot of jobs could be created.

Moreover, rural welfare schemes need to be boosted with adequate resources. For example, MGNREGA should be provided additional money and the minimum wages, as applicable in different States and as demanded, should be enforced. Besides, to ensure that schemes and projects are properly implemented, strict monitoring is required which is abysmal.

Importantly, there is need to discard the top-down approach and accept the bottom-up strategy. This means giving more power to the panchayats by allowing them to identify projects and schemes that benefit the poor and the EWS without imposing them from above. Job creation should primarily be aimed at the rural sector and rural enterprises should be given a boost through technology transfer and re-skilling employees.  

In fact, the present challenge has to be tackled in a manner conducive to Indian conditions -- and not what Western influenced experts say -- with an emphasis on job creation, infrastructure building and rural revitalisation. Whatever the urban planners or specialists may say, the focus of attention has to be on the majority of the population. -- INFA  

(Copyright, India News and Feature Alliance)