Think Tank

Elections and Beyond: the Next 5 Years

In conversation with Sachin Kalbag, Executive Editor, Hindustan Times

With the BJP securing a huge electoral mandate, it has the opportunity to push through reforms in a host of policy areas, from agriculture and taxation to land, labour and capital markets. In this regard, many had expected the July Budget to mark the new government’s first real ‘statement of intent’. This did not really prove to be the case and analysts continue to parse through the signals to discern what the next five years might bring. Plainly, there is a whole gamut of challenges to contend with. At the widest level, India will need to focus on becoming not just a prosperous country but one that is socially equitable. At a more micro level, there are myriad issues, many specific to cities or districts, that ultimately feed into India’s global competitiveness. At a recent Forum session in Hyderabad, we asked Sachin Kalbag, Executive Editor at the Hindustan Times, to spell out the priorities, both immediate and medium-term, for Narendra Modi’s government.

Vehicle and home sales are slowing, as are imports

Consumer confidence is down – but government pump-priming may not be the answer

A consumption slowdown
For many months, the sales data for cars, two-wheelers, tractors and real estate have all pointed in one direction: down. Car dealerships are struggling across the country and outside of the ‘premium’ segment (Rs 30 million and above), the inventory of unsold homes in metros has increased. Non-oil, non-gold imports shrank in the first quarter of 2019-20. Clearly, with even moped sales – the bottom rung of the auto sector – slowing, consumers lack the confidence to spend. Some have suggested that the government and/or the RBI can step in by ramping up spending and cutting interest rates but this is a double-edged sword. During the global financial crisis, the Centre more than doubled its fiscal deficit, from 2.6% of GDP in 2007 to 6.6% two years later, and the impact is still being felt. By 2011-12, India was seeing double-digit inflation and banks were burdened with bad loans. More generally, public spending tends to push up retail interest rates, impacting both borrowing and spending. Thus, it is no panacea.

Affordable housing has got a big push but states will need to be roped in more closely

Mass housing
In the last few years, the Centre has made a big push on affordable housing, particularly through its PMAY scheme. Many of these developments, however, are in somewhat remote locations, and some lack basic amenities such as reliable water or electricity supplies. There also appears to be a growing disconnect between the Centre’s own efforts and those of the states, which run their own mass-housing programmes. Going forward, the entire project may need to take on a more federal structure for it to succeed.

Issues around land ownership are a big impediment, costing India dearly

Land reforms
Issues around land ownership affect millions of people, countless businesses, and exert a cost on the economy. The biggest lacuna is the absence of clear titles: land owners can be challenged on multiple issues, including ownership, boundaries, financial encumbrance, inheritance, sub-divisions and so on. In some states, including Maharashtra, farmers who fail to obtain a specific paper form cannot legally stake a claim on their land. Businesses find it hard to acquire land without fear of being on the wrong side of the law, and economists estimate that the confusion over land titles alone has cost India as much as 2.5% of GDP. Outdated laws, including the Registration Act of 1908, the Transfer of Property Act, and the Indian Contract Act, are a big part of the problem. Encouragingly, the Centre appears to be serious about fixing some of the bigger land-related issues in the next 4-5 years.

More money is needed for recapitalisation but the government – and the economy as a whole – cannot afford it

The financial health of banks and NBFCs
As of end-2018, PSU banks alone held NPAs worth Rs 6.4 trillion, and in the four years to March 2018, they had to write off upwards of 85% of their bad loans. This suggests that the government’s recapitalisation efforts – Rs 2.7 trillion so far, including the Rs 700 billion committed in the latest Budget – may fall short of what is needed to restore these banks to full health. A comprehensive, one-shot recapitalisation is not fiscally viable and would burden the economy for years, but unless the situation is corrected, banks cannot lend freely. The recent NBFC crisis has added to this problem. However, the crisis itself traces back – at least in part – to the fact that banks, having earned poor returns on their NPAs, tripled their lending to NBFCs in the last 3 years.

Stagnant food prices, skill gaps and issues around market access, all add to farmer distress

Farm distress
Farmer suicides are only the most visible sign of India’s agricultural crisis. Food prices have been stagnant or falling for years, causing farmers to sell their produce below cost. Road linkages remain weak, as does access to formal lending institutions – which forces farmers to borrow from moneylenders at exorbitant rates. Further, thanks to the APMC Acts, they cannot market directly to urban consumers and middle-men swallow up the huge difference between the mandi and retail prices. Unfortunately, India has not been able to make a smooth transition from farm jobs into low-end manufacturing, and then into services. Skill gaps remain huge, as does the cost of acquiring new skills. Moreover, low-end urban employment, which has grown steadily for years, is reaching a saturation point.

Indian cities routinely face floods or drought – and water gets little attention from policymakers

An urban water crisis
Just before the monsoon arrived in early July this year, Mumbai’s water reserves were down to near-crisis levels. Chennai regularly faces water shortages and in New Delhi, residents must drill borewells hundreds of feet deep before they hit the first drops of water. Cities like Bangalore and Chandigarh have started to experience major water-logging, which was never an issue in the past. Major wetlands, which helped flood-proof the cities, have been handed over to developers. Each year, then, there are either floods or drought in many large cities – a factor that plays into investment decisions. Regrettably, water does not figure prominently, if at all, in most policy decisions. So far, the solutions, whether at the state level or at the Centre, have been piecemeal, and even the recently-created Jal Shakti mission does little to promote local solutions – which is the only way forward.

Indian exports are stagnating and little is being done to take advantage of shifting global supply chains

Exports – and global trade wars
As a share of GDP, exports have barely moved in the last few years. In absolute terms, export growth is slowing or even reversing and the trade deficit is on the rise. Partly, this has to do with delayed tax refunds, which cut into exporters’ working capital, making it harder for them to fulfil orders. Meanwhile, China has steadily replaced Indian manufacturers in a wide range of low-value-add items for domestic consumption, limiting the scope for industrial job creation. On the whole, India – unlike countries like Vietnam, Taiwan or even Bangladesh – is not doing enough to take advantage of the opportunities thrown up by the US-China trade war. Although the recent Budget contained some protectionist measures, far more needs to be done – and urgently – for India to regain lost ground.