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1 November 2016
Author: Rajiv Kumar, Centre for Policy Research
Two recent data announcements seemed to have escaped policy attention among ongoing exuberance about ‘surgical strikes’ in Pakistan and hoopla about the Outreach Summit in Goa between leaders of Brazil, Russia, India, China, South Africa (BRICS) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). Both of these recent announcements herald difficult times for India’s economic future.
First, gross fixed capital formation (GFCF), which broadly indicates total investment in plant and machinery, was reported to have declined for the second successive quarter by 3.1 per cent in the April–June 2016 period. This kind of drop is virtually unprecedented. To put it in context, GFCF increased by 24.5 per cent in 2011–12 when GDP growth was 7.0 per cent. Negative GFCF growth implies that an economy’s productive capacities are shrinking.
Second, monthly growth of commercial bank credit to the non-food sector plummeted to 8.3 per cent in August 2016 compared to its earlier peak of 38.4 per cent in 2005–06. Bank credit to industry in August 2016 also contracted by 0.2 per cent, implying that commercial banks have effectively stopped lending to the industrial sector. Again, to put this in perspective, growth in commercial bank credits to industry was 26.5 per cent in August 2010 and 23.6 per cent in August 2011. For it to have become negative reflects deep distress in both the banking and industrial sectors.
Urgent action is warranted. Investment weakness and loss in employment will have serious social and political consequences. Symptoms are already visible, with Patel agitation in Gujarat, Jat madness in Haryana, Gujjar movement in Rajasthan and Maratha mobilisation in Maharashtra reflecting the rising impatience of India’s much-vaunted youth.
These agitated youth need employment. But they don’t just need any work, they specifically need high-quality jobs with proper working conditions and reasonable remuneration. Indian Prime Minister Narendra Modi would do well to direct his economic team to focus on attracting more investment and generating new jobs before it is too late.
There are a number of specific policy actions that should be put in motion. First, the government must start a time-bound and ambitious program of public housing for urban workers and landless labourers. Housing construction has extensive links with the remainder of the economy and can simultaneously spur investment and consumption demand. This policy should be given priority over ‘smart city’ initiatives, which take years to see any real investment benefits.
Second, the Indian government should actively encourage growth in tourism and export-oriented apparel sectors as these have immense employment opportunities. The recently introduced textile policy is a step in the right direction but needs far greater focus on implementing capacity expansion and providing real assistance to small- and medium-sized exporters. Private and foreign tourism operators and investors should also be consulted in order to identify and address the major constraints facing the sector.
Third, the Reserve Bank of India can help by ensuring a weak rupee and ignoring the advice of those who call for a strong rupee on some pretext or another. This will help labour-intensive exports, a sector that is critical to propelling India into double-digit and employment-intensive GDP growth.
The proposal to establish Coastal Economic Zones — put forward by the National Institution for Transforming India (NITI Aayog) — is 30 years behind the times and totally unworkable in Indian conditions. As early as the mid-eighties, the suggestion to design large export processing zones along the same lines as China was rejected by the government as being impractical. These proposed zones are a non-starter and should be abandoned.
India’s stocks continue to remain relatively high in global markets. This is therefore the right time to make the extra effort to attract greenfield foreign direct investment (FDI) for capacity expansion, particularly through joint ventures with the second rung of private sector firms. These ‘next 500’ private sector firms — not the top 100 corporates that constantly hog all the policy space — are natural partners to foreign investors. But they need a helping hand. NITI Aayog should extend that helping hand and monitor potential joint ventures and FDI inflows while addressing any outstanding problems that could discourage FDI.
NITI Aayog should also regularly monitor and report on the progress made under the ‘Start Up India’ and ‘Stand Up India’ campaigns as they are ostensibly the government’s principal instruments for generating fresh employment. Good news on investment and employment should be publicised to improve India’s sagging business and consumer sentiment.
Public capital expenditure has held up investment levels during 2015–16 and this trend looks to continue into the next financial year but with the added concern of less fiscal space in the federal budget. The committee in charge of examining this issue will hopefully submit their report soon and emphasise that minimising revenue deficit is the real goal of fiscal policy. That will then give the government greater flexibility to use borrowings as a counter-cyclical measure to trigger the investment cycle.
Finally, the confusion about GDP growth estimates must be squarely tackled. The new series simply does not inspire confidence as these high GDP numbers tend to create a sense of complacency that all is well in the economy, which is patently not the case.
Modi recognises that the state of the economy and generating much needed jobs will be key to the National Democratic Alliance’s prospects. The time to act is now, before persistent investment weakness and a shortage of real jobs spark unmanageable social unrest and seriously adverse political outcomes.
Rajiv Kumar is the founder and Director of the Pahle India Foundation and a Senior Fellow at the Centre for Policy Research, Delhi.
This article was first published here at The Times of India.
Author: Rajiv Kumar, Centre for Policy Research
Two recent data announcements seemed to have escaped policy attention among ongoing exuberance about ‘surgical strikes’ in Pakistan and hoopla about the Outreach Summit in Goa between leaders of Brazil, Russia, India, China, South Africa (BRICS) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). Both of these recent announcements herald difficult times for India’s economic future.
First, gross fixed capital formation (GFCF), which broadly indicates total investment in plant and machinery, was reported to have declined for the second successive quarter by 3.1 per cent in the April–June 2016 period. This kind of drop is virtually unprecedented. To put it in context, GFCF increased by 24.5 per cent in 2011–12 when GDP growth was 7.0 per cent. Negative GFCF growth implies that an economy’s productive capacities are shrinking.
Second, monthly growth of commercial bank credit to the non-food sector plummeted to 8.3 per cent in August 2016 compared to its earlier peak of 38.4 per cent in 2005–06. Bank credit to industry in August 2016 also contracted by 0.2 per cent, implying that commercial banks have effectively stopped lending to the industrial sector. Again, to put this in perspective, growth in commercial bank credits to industry was 26.5 per cent in August 2010 and 23.6 per cent in August 2011. For it to have become negative reflects deep distress in both the banking and industrial sectors.
Urgent action is warranted. Investment weakness and loss in employment will have serious social and political consequences. Symptoms are already visible, with Patel agitation in Gujarat, Jat madness in Haryana, Gujjar movement in Rajasthan and Maratha mobilisation in Maharashtra reflecting the rising impatience of India’s much-vaunted youth.
These agitated youth need employment. But they don’t just need any work, they specifically need high-quality jobs with proper working conditions and reasonable remuneration. Indian Prime Minister Narendra Modi would do well to direct his economic team to focus on attracting more investment and generating new jobs before it is too late.
There are a number of specific policy actions that should be put in motion. First, the government must start a time-bound and ambitious program of public housing for urban workers and landless labourers. Housing construction has extensive links with the remainder of the economy and can simultaneously spur investment and consumption demand. This policy should be given priority over ‘smart city’ initiatives, which take years to see any real investment benefits.
Second, the Indian government should actively encourage growth in tourism and export-oriented apparel sectors as these have immense employment opportunities. The recently introduced textile policy is a step in the right direction but needs far greater focus on implementing capacity expansion and providing real assistance to small- and medium-sized exporters. Private and foreign tourism operators and investors should also be consulted in order to identify and address the major constraints facing the sector.
Third, the Reserve Bank of India can help by ensuring a weak rupee and ignoring the advice of those who call for a strong rupee on some pretext or another. This will help labour-intensive exports, a sector that is critical to propelling India into double-digit and employment-intensive GDP growth.
The proposal to establish Coastal Economic Zones — put forward by the National Institution for Transforming India (NITI Aayog) — is 30 years behind the times and totally unworkable in Indian conditions. As early as the mid-eighties, the suggestion to design large export processing zones along the same lines as China was rejected by the government as being impractical. These proposed zones are a non-starter and should be abandoned.
India’s stocks continue to remain relatively high in global markets. This is therefore the right time to make the extra effort to attract greenfield foreign direct investment (FDI) for capacity expansion, particularly through joint ventures with the second rung of private sector firms. These ‘next 500’ private sector firms — not the top 100 corporates that constantly hog all the policy space — are natural partners to foreign investors. But they need a helping hand. NITI Aayog should extend that helping hand and monitor potential joint ventures and FDI inflows while addressing any outstanding problems that could discourage FDI.
NITI Aayog should also regularly monitor and report on the progress made under the ‘Start Up India’ and ‘Stand Up India’ campaigns as they are ostensibly the government’s principal instruments for generating fresh employment. Good news on investment and employment should be publicised to improve India’s sagging business and consumer sentiment.
Public capital expenditure has held up investment levels during 2015–16 and this trend looks to continue into the next financial year but with the added concern of less fiscal space in the federal budget. The committee in charge of examining this issue will hopefully submit their report soon and emphasise that minimising revenue deficit is the real goal of fiscal policy. That will then give the government greater flexibility to use borrowings as a counter-cyclical measure to trigger the investment cycle.
Finally, the confusion about GDP growth estimates must be squarely tackled. The new series simply does not inspire confidence as these high GDP numbers tend to create a sense of complacency that all is well in the economy, which is patently not the case.
Modi recognises that the state of the economy and generating much needed jobs will be key to the National Democratic Alliance’s prospects. The time to act is now, before persistent investment weakness and a shortage of real jobs spark unmanageable social unrest and seriously adverse political outcomes.
Rajiv Kumar is the founder and Director of the Pahle India Foundation and a Senior Fellow at the Centre for Policy Research, Delhi.
This article was first published here at The Times of India.
