Why a big bang package of reforms is inevitable to revive a stuttering economy

The upcoming budget, to be unveiled on 1 February, will set the tone for an Indian economy that is currently floundering in the doldrums. All eyes will be on Finance Minister Nirmala Sitharaman and the Finance Ministry as they look to structure what is likely to be one of the most important Union Budgets of the decade.

With international rating agencies projecting India’s economic growth to rise no higher than 5 per cent in the coming fiscal year, and GDP growth for the second quarter of this financial year standing at 4.5 per cent – the lowest it has been in over a decade – there is little debate that an economic revival will need to hinge on an acknowledgement that the current slowdown is structural in nature. An alarming national unemployment rate of 6.1 per cent (as recorded in FY 2017-2018) – the lowest it has been in 45 years – also means that increasing labour force participation must be high on the agenda.

As per a Periodic Labour Force Survey, participation has dropped to 46.5 per cent for those aged 15 or above. For the urban youth (between 15 and 29 years), this figure is at 37.7 per cent suggesting that increased allocations to government employment schemes like the PM-KISAN and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) will be crucial not just in ensuring India’s youth are utilised, but in boosting aggregate demand also. With savings rates across rural India also plummetting, placing more money in the hands of farmers and landless labourers is likely to add steam to the economy.

Speaking of savings and investment rates, it is clear to see that a large part of the economic slowdown currently plaguing the nation has been due to poor performance across these metrics. Savings and investment rates have typically fluctuated between 35 and 40 per cent of total GDP. Although the saving rate for 2019 is not currently public, the investment rate for FY2019-20 is estimated to be at approximately just 30.1 per cent.

A drowning financial system will also need to be addressed in the upcoming budget. The NPA assets ratios for public sector financial entities was estimated at a whopping 12.7 per cent in September 2019. Coupled with the distress being felt by NBFCs since a series of defaults by IL&FS in the last two years, this means that the banking system can no longer be used as a vehicle to boost growth. Rescuing the banking sector will begin with removing resistance to investing in real estate and infrastructure projects, and the Budget must incorporate measures to achieve this, whether this is via improving regulatory certainty, or through a broader evaluation of public sector bank management.

The government must also acknowledge the failure of the current Goods and Services Tax regime. The greatest sufferers of the GST have been the MSME segment, and re-evaluating the programme entirely so as to remove compliance bottlenecks and costs, constant rate revisions, and rate differentiation will be important in helping the segment bounce back. Furthermore, addressing the liquidity crunch that NBFCs – the primary route by which MSMEs acquire capital funding – will also work toward driving consumption upward.

Much has been said about the swelling fiscal deficit and with some estimates showing that it could rise to as much as between 3.8 and 4 per cent of total GDP (despite FM Sitharaman’s target of 3.3 per cent), there is good reason to keep an eye on it. However, an acknowledgement that the current slowdown is more structural in nature should see the government revise its fiscal deficit calendar, and focus devotedly on growth in the short-term.