Three Years Of Modi Govt: Looking At The Proverbial Glass
The NPA problem should be recognised as not merely a banking problem, but a national problem
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For any government, entering its fourth year, it is remarkable that Prime Minister Narendra Modi-led government continues to enjoy such strong popular support. The UP election outcome was a thundering mandate. Two-third respondents in an online national poll said that the government meets or exceeds expectations. For a PM who started off with high expectations, this is no mean feat.
The macro record is mostly positive. Inflation is down from 12 per cent four years ago, to less than 5 per cent. Low inflation and price stability is essential for sustained economic growth. The twin deficits are modest. The fiscal bonanza of low oil prices was used prudently to shore up investments in infrastructure and rural areas. The stock markets are at record peaks, signalling strong confidence of investors about future outlook. Exports have begun picking up. Policy reform includes the much-awaited Goods and Services Tax (GST), a new bankruptcy law, an ordinance to deal with NPAs, the UDAY scheme to rescue electricity distribution companies. These are all long-term positives.
So, what are the ‘glass half empty’ parameters? And what should be the priorities for the next two years? The areas of concern are as follows: the still stagnant private sector investment, the very low growth of bank credit and resolution of NPAs; and most worryingly the spectre of jobless growth.
The government’s labour bureau reports that in eight key sectors tracked by the bureau, job growth has been the lowest in past eight years, with just 1.5 and 2.3 lakh jobs added during 2015 and 2016, respectively. The IT sector has announced layoffs, a fact sure to strike fear among prospective engineering and science graduates. This is one of Modi government’s biggest challenges.
A World Bank study claims that more than 50 per cent of India’s manufacturing jobs are vulnerable to losing out to automation. There is also the irony that India has simultaneous coexistence of jobs shortage and skills shortage, which points to a big mismatch between what industry needs and what the training colleges, institutes and universities are putting out. Even in the field of IT, the days of wage arbitrage may be over, as automation and artificial intelligence gain ground, so new skills and curriculum are required. The jobs challenge requires at least two prongs. One is a focus on skilling, training and curriculum development, training the teachers, university reform. Much of this needs public funding. This is because the market for training low income youth is not viable for private sector, but the benefit to society from well-paid tax-paying youth is huge.
The second prong is to change the narrative from jobs to livelihoods. What we need is not 1 million new jobs every month, but 1 million new livelihoods. These will come only if at least 50,000 new enterprises are born every month. That’s because most of the new jobs will come from micro, small and medium enterprises. That calls for a big focus on ease of starting new businesses, with minimal delay, streamlined clearances, easy access to capital, infrastructure, electricity and connectivity. The rollout of GST will hopefully increase access of small vendors to large companies and retail sector, as state boundaries get blurred.
As for reviving private investment spending, that is currently constrained by excess capacity, high leverage and burden of loans, threat of cheap imports (from overhang of capacity in economies like China) and high cost of capital. Some of this is changing with increase in business confidence and optimism about growing demand. Publicly built infrastructure will crowd in, rather than crowd out, private investment. The government must also make good progress on its disinvestment targets.
As for banking, the NPA problem should be recognised as not merely a banking problem, but a national problem. The new ordinance along with the new bankruptcy law will hopefully resolve the problem to a large extent, and enable healthy flow of bank credit.
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