ECONOMIC OUTLOOK

2018 – A challenging year for Modi & Co

wholesale-vegetables-market [File] Representative image | AP

More than half of India's 1.3 billion population is in the 20–59 age group and they increasingly aspire for greater empowerment and a better quality of life. It is in recognition of these joint aspirations that Prime Minister Narendra Modi has called for the transformation of India with the “Participation of All and Development of All – Sabka Saath, Sabka Vikas.”

NITI Aayog's Three Year Action Agenda for 2017-2020 recognises PM Modi's yearning and proposes a path to achieve the all round development of India. As the BJP-led NDA government's time is ticking away, people are still waiting for the Achche din – Good Days – which Modi had promised in the summer of 2014, as he campaigned for the Lok Sabha elections.

He had promised to bring in high growth that would result in the creation of one crore jobs a year. The employment outlook during April-June 2017 was the lowest since 2001, and the government has not been able to create even 10 lakh jobs a year. Even as the discourse has shifted from jobs to skilling and entrepreneurship, and promises of revival of industries, the industrial growth is below 3 per cent, lower than that of the last two years of UPA 2.

Still many are naive enough to think that the Prime Minister will accomplish all the promises through the Union Budget in February 2018, which will also be the last full budget of this government. It is widely believed that the budget will be aimed at allocating funds on priority basis, such that Modi's claims and promises would sound credible, when he goes for 2019 Lok Sabha elections.

The government has committed to double farmers' incomes by 2022. While the jobless and unemployed know their plight, the government has, while pooh-poohing joblessness, presented a new way of looking at it. The government characterised the situation by acknowledging that severe under employment is the problem, and “those who are employed are overwhelmingly stuck in low-productivity, low-wage jobs,” along with the challenges in creating jobs in rural areas.

The aam aadmi who wants achche din may not understand growth figures, but those who suffered job losses on account of demonetisation, and traders and small industries who are still trying to figure out GST, know what they have gone through – definitely not the good days.

Manufacturing sector is almost at a stand still, corporates want a lower tax, health care system is abysmal and is getting costlier with every passing day, people demand a substantial reduction in direct taxes, and the business and industry want a simplification of GST into one or two simple rates. Government has to retain the fiscal deficit at 3.5 per cent of the GDP.

The tax payers' money has been used to refinance ailing public sector banks and as a result there is a lack of credit where banks are hesitant to lend, and entrepreneurs are reluctant to avail of credit.

Economic outlook for 2018

The government is expected to increase the allocation for MNREGA so as to create more rural jobs, especially after thousands had fled cities and towns during the early months of demonetisation, looking for 100 days of job under the employment guarantee act, and are yet to return to the cities. Sources indicate that the allocation may increase by as much as 25 per cent to Rs 60,000 crores, and it is expected to somewhat reduce rural distress and agrarian crisis.

Modi government believes that merely increasing the minimum support price (MSP) for paddy, wheat and other major crops, will not help, since it covers only a limited commodities. But given the enormity of the agrarian crisis, the finance ministry may introduce, for the first time, “Price Deficiency payment” under which a subsidy will be provided if prices fall below the MSP. “The government will focus on reforming agricultural produce marketing policies and interventions so that the farmers receive a major part of the money that final consumers pay. Now there is a huge difference, which is to the detriment of the farmer”, said a NITI Aayog source. The rationale against hiking MSP seems to be that of inflation, which may be triggered off at a time when people are facing high costs of food items, particularly vegetables and other essentials.

So far the government has responded to the issue of farm crisis with policies of soil health cards, crop insurance subsidy and neem coated urea, which have not shown any real benefits to the farmers.

Through its Startup India scheme, the government intends to use technology to double farmers' income, and have now challenged innovators with big baits.

The government has over the last few months announced huge public spending in the infrastructure sector, particularly, the Bharat Mala scheme comprising national highways and rural roads. The allocation for 'growth enablers' of which infrastructure is a major one, is expected to cause a huge leap. “It will create jobs directly and indirectly” says NITI Aayog CEO Amitabh Kant. The other growth drivers which will also see allocations are digital connectivity, energy, science and technology. The aims to create an “effective innovation ecosystem”.

Modi has always emphasised that “Centre + States = Team India,” while that is true, there exists a competition between centre and states for taking credit before the voters.

The subject of loan waiver is something that no one in the finance ministry wants to address, by pointing out that it is the states that announce such schemes, and they are expected to find the resources for it. “The Centre will not annouce loan waiver schemes, not even on the eve of elections, let alone in the upcoming budget. The political view is that this benefits the state government. And in any case the focus is to help the agriculture sector grow into a self sustaining market,” said a source from finance ministry. At a rally in Gujarat, Finance Minister Arun Jaitley described the Congress manifesto promising a loan waiver as, “financially impossible”. The state governments that have implemented loan waivers are in a soup of sorts, adding to the Central government's determination to stay clear of any loan waiver.

Budget 2018 cannot help the government appease those who have been hurt by GST rates. While simplification of GST to two rates, and lowering of rates remain on many group's wishlist before the finance minister, the rates can be changed only by the GST Council that includes finance ministers of the states.

It is reasonable to suggest that Jaitley may reduce corporate tax by a per cent or so, and give a small relief to tax payers. But the countryside is already dejected that while denying them a loan waiver, the government has refinanced banks that have huge and growing NPAs, which interpreted by activists as a part of crony capitalism by this government. To counter that, the government will talk of Direct Benefit Transfers, by which people can experience the benefits.

There are indications that more subsidies will be brought under the DBT. In 2017-18, Rs 84729.17 crores have been transferred to beneficiaries under 399 schemes covering petroeluem and natural gas, food and public distribution, and rural development among others.

Jaitley's biggest challenge will however be to demonstrate through this budget that the war against corruption is still going on in the right direction. Notwithstanding the fact that the CBI Special Court Judge O.P. Saini has given those accused in the 2G scam a clean chit. It was this scam that brought corruption to the forefront of election campaigns, and resulted in the victory of the BJP. A clear demonstration of fighting corruption, through the budget, is all the more necessary because people, particularly the poor, faced the brunt of the demonetisation that was aimed at unearthing black money, which terribly failed to bring in the desired result.

The government then claimed that the aim of demonestisation was to create a digital or less cash economy. But the cost of digital transactions have since begun to pinch.

The other worries that Modi and Jaitley will have to address through the budget and throughout the financial year is about how the government will tighten the grip on defaulters and ensure that banks won't groan under fresh NPAs, and also that the depositors' money is safe in bank accounts. The FDRI Bill has already caused worry and consternation among the public.

The clearing of NPAs alone cannot be expected to make the wheels of industry chug into productivity. An enabling atmosphere that provides incentives to produce; demand creation that will come with money in peoples' hands; keeping the fiscal deficit at the current level, are all part of Jaitley's big challenge.

As of now, the reality is joblessness, declining growth, jammed industrial sector, growing NPAs, agricultural crisis, and above all the widening disparity between the rich and the middle class. The government's defense is a pack of platitudes like – reforms will be painful, but there will be a bright rainbow on the other side of the tunnel; that India is the fastest growing economy in the world and we have beaten China; India have moved this many points up in the Ease of Doing Business. But addressing the real issues still remain a crucial challenge for the government.

The 2018 budget and the next few months are time for Modi and Jaitley to show signs of revival that people can see.

In the Economic Survey 2016-17, Chief Economic Adviser Arvind Subramanian had hailed the demonetisation drive for it potential benefits in the long run. Among the follow up actions he suggested, in order to maximise the benefits, were further tax reforms including bringing land and real estate into the GST, reducing tax rates and stamp duties and action to allay anxieties about over-zealous tax administrations. These, he said, would allow growth to “return to trend in 2017-18, following a temporary decline in 2016-17.”

The CEA had also stressed the need for “societal shift in ideas to overcome three long-standing meta-challenges – ineffficient redistribution, ambivalence about the private sector and property rights, and improving but still challenged state capacity.” These, in his view, were critical for “ensuring that India's sweet spot is enduring not evanescent.”

Bibek Debroy who heads the Economic Advisory Council of the Prime Minister recently said that in 2030, India's national income will be around $6.5-7 trillion, a feat that can be achieved with a growth rate of around 7 per cent every year.

Former Chief Economic Advisor Kaushik Basu, however, said that while the growth rate now is 6.3 per cent, it should have been over 9 per cent given the low oil prices. “The massive slowdown needs to be properly diagnosed,” he says, pointing out that India's fastest growth rate, for 7 years between 2005-12, was at 8.1 per cent per annum. “It had reached a rate of 9.5 per cent from 2005 to 2008. A major driver was high investment rate. This is slipping and needs to be boosted. India's service sector growth of 8.6 per cent exceeded virtually all economies including China. But don't neglect this sector," he warns.

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