It'll be good for the economy if the ruling regime focuses on urgently creating consumer demand and ensuring more liquidity in system, instead of prioritizing its socio-political agenda
Every cloud has a silver lining. The humiliating defeat of the Bharatiya Janata Party (BJP) in just-concluded Jharkhand state elections could just be what spurs the central government to shift its focus back on the economy. The Hemant Soren-led alliance of JMM, Congress and RJD attained a majority in the 81-member Jharkhand assembly by clinching as many as 47 seats. This was way past the required majority mark in the Jharkhand assembly, while BJP has won only 25. The poor strike rate for the BJP, which had contested 79 of 81 seats in the Jharkhand assembly, is telling something. The economy needs Prime Minister Narendra Modi's undivided attention. For a country that aspires to double in size and attain the $5 trillion mark in a few years, economic growth is the main engine. Unfortunately, there is a belief gaining ground that the ruling dispensation at the Centre has been prioritizing the socio-political agenda more than the economic agenda. After getting a thumping victory in May 2019 Lok Sabha polls, the second tenure of Modi government has, unnecessarily, focussed a lot of attention on non-economic factors. But, as the Indian economy slows and discontent becomes widespread, it is important that the BJP government makes economy its centerpiece for its 'New India'.
5th state slips out
The defeat in Jharkhand is important both from standalone and consolidated points of view. BJP supporters can argue that the loss of an incumbent government is not very dramatic. But, that argument is simply forgetting that BJP losing over 17 per cent of the vote (Lok Sabha) in just six months. The Jharkhand state elections happened when the national scene was becoming heated due to the national-level debate on the question of citizenship such as CAA and NRC. Yet, it was only in the third and fourth rounds when CAA and NRC issues came to the fore through mass protests across India. Various state-level factors are being highlighted by election pundits to justify why BJP lost. By the way, Raghubar Das became BJP’s first incumbent chief minister to lose an election.
From an all-India point of view, Jharkhand is the fifth state slipping out of the BJP’s hands. Over the last few months, the party has lost Rajasthan, Madhya Pradesh, Chhattisgarh, Maharashtra and now Jharkhand. Even in Haryana, BJP had to form an alliance government after a reduction in the seat tally. Though the economic experts in BJP don't feel the Indian economy is in dire straits, the situation alarming. Outside of BJP, expert after expert has been talking about the grave situation. This is no ordinary slowdown. Till now, India has witnessed six consecutive quarters of deceleration in GDP growth. The economy is sending an SOS, but the approach of the Centre seems to indicate that the economy will fix itself. That is not how major economies revive.
While BJP is fulfilling its socio-political agenda of Abrogation of Article 370 and Abolition of Triple Talaq, Ram Temple at Ayodhya, etc., the pain of slowing economy and weak overall underlying macro parameters are now reflecting in the political outcomes. Perhaps, the Jharkhand jolt for BJP will act as a trigger for the Central government to re-focus on the economy. Sharp slowdown in consumption and weak consumer sentiment have taken centrestage in the economic narrative. While the government has announced several steps to revive growth over the last four months, it has to work hard to bring actual results from the so-called reforms.
"While Jharkhand is a relatively small state with just 14 out of the 544 Lok Sabha seats, the BJP’s failure to retain power in several important states means that the party’s influence at the state level is shrinking and with the passage of time will impact its standing in the Rajya Sabha. It may also pose issues in the implementation of its governance agenda and derail the pace of overall execution of national policies," says Motilal Oswal Research. The brokerage expects the government to take more steps going forward to revive demand and sentiment. The Union Budget to be presented on February 1, 2020, will be a key macro event to watch out for.
Faltering economic growth has come with its own fiscal implications. Weakening growth has led to lower-than-expected revenues and necessitated the government to spend to support growth. As a result, there are expectations of large fiscal slippage in FY20.
The Indian economy has come a long way from worries about monsoon. The rains staged a smart recovery after a weak start and ended with the best rainfall in a few years. In September, it ultimately took a bold step by the government in corporate tax rate cut for the markets to regain the previous highs. However, the problems of the Indian economy can't be seen if we look at them through the prism of life-time highs of stock markets.
Banks today are not generating non-performing assets (NPAs), but they are not generating much industrial credit growth too. ICRA estimates the year-on-year (Y-o-Y) growth in bank credit is expected to decelerate sharply to 6.5-7 per cent during FY20 from 13.3 per cent during FY19, following limited incremental credit growth during FY20 till date. Without manufacturing prowess and robust private sector participation, the country, and by extension the economy, will forever be at the mercy of others.
At a recent FICCI event held in New Delhi on December 21, eminent CEOs of India Inc highlighted the need for Indian manufacturing to become globally competitive and joining the global value chain as the key ingredients for making India a $5 trillion economy. Speaking at FICCI’s 92nd annual convention on the theme ‘India: Roadmap to a $5 Trillion Economy’, Anil Kumar Chaudhary, Chairman, Steel Authority of India Ltd (Sail) said: "If we have to reach the level of $5 trillion economy by the next five years, we have to be globally competitive."
India also needs to increase its exports of steel and other manufactured items, Chaudhary said at the CEOs panel discussion held on the second day of the annual convention moderated by Raj Jain, CEO, Bennett Coleman & Co Ltd. Sanjiv Puri, Chairman and Managing Director, ITC Ltd, said that while farming is directly a large employer with lots of jobs created in the post-harvest management, even the food processing segment has the largest employment to capital ratio. “We need to plug into the global value chains in value-added agricultural products,” he added.
Rajan Bharti Mittal, Vice Chairman, Bharti Enterprises, said that the government should focus on strengthening the digital backbone of the country. "Industry has been disrupted and when the industry gets disrupted the government needs to step in, especially if the country aspires to be an economic power and is aspiring to be a $5 trillion economy," he said.
Harsh Pati Singhania, Vice Chairman & Managing Director, JK Paper Ltd, said that the country’s manufacturing sector first needs to become internally competitive as several factors are still holding it back including the multiplicity of regulations from different regulators.
"As long as we have one new rule for every transgression, which seems to be happening now, it will be difficult to become globally competitive,” he said.
The captains of the industry present at the discussion also highlighted the need to support both the small and medium industries (SMEs) and the large industries. They said while the SMEs create large number of employments, the large industries bring in the latest technologies.
Negative to Positive
Till November 2018, BJP was in power in as many as 19 of the 29 states. Today, the number of states is far lower. Perhaps, political defeats will force the party to solely focus on 'Vikas,' meaning growth. The Indian economy can't afford to be overlooked.
So far, a battalion of ministers and officials have accepted the Indian economic slowdown as being cyclical only. This attribution to a 'business cycle' is worrying many. What if the economic slowdown is not cyclical? What is the economic sluggishness is due to structural, or more long term factors?
The Jharkhand defeat allows the BJP government a wonderful moment to reflect upon its policies. Merely, cutting or lowering cost of loans is not going to do the trick. Banks, which provide the lifeblood to the Indian economy, are essentially a one-pony trick today due to their over-reliance on consumer lending. “Lenders have been shifting their focus away from large industrial loans towards retail loans, as bad loans of the latter have traditionally been low,” RBI noted in a report.
Despite the overall improvement in banking performance continuing during the first half of 2019-20, a slowing down of bank credit growth has emerged as an area of concern, the RBI said. Bank credit to industry decelerated in 2018-19 and in 2019-20 so far, partly tracking the slowdown in industrial production. In 2018-19, out of the 19 industry sub-groups, credit accelerated only to eight as compared with 12 in the previous year.
Lower interest rates can't bring back demand. Demand has to be generated by giving gainful employment. As more people get sustained income, they will consume and thus nurse the Indian economy back to health. The International Monetary Fund (IMF) has said that India's high growth rate in recent years did not lead to a matching increase in formal sector jobs and labour market participation has declined.
The IMF's report on its annual consultations with India released in Washington said that while India has lifted millions out of poverty as one of the world's fastest-growing economies, "recent labour market data suggests that unemployment is high, while labour force participation has decreased, particularly for females."
"Without more inclusive and sustainable growth, India's potential demographic dividend over the next few decades, from its young and rapidly-growing labour force, could be wasted," the report warned. This is where the central government needs to intervene and ask companies to turn on their hiring cylinders. Without massive levels of employment, discontent will spread and will ultimately hurt the interest of the ruling BJP dispensation at the political level.
The IMF report pinned the slowing growth of the Indian economy on the deceleration of consumption and investment that was made worse by regulatory uncertainty. It said the relatively low food prices contributed to 'rural distress.' While the central government has given money to a small section of farmers and state governments have tried to waive farmer loans, the farmer community can be benefitted much more by giving higher prices for their produce. Onion prices had sky-rocketed to Rs 200 per kilogram, but the producing farmer did not even get Rs 50 per kilogram!
Put socio-political agenda on the backburner
The BJP's win in 2014 was on the back of 'Acche Din' dream sold smartly by Narendra Modi. That hope still lives on. Distractions like CAA/CAB, NRC, Ram Temple, etc., are causing massive confusion to what the BJP seeks to achieve in its second term. So, it will be good to drop such plans and instead re-focus completely on the economy. Every year of sub-par growth for the Indian economy will mean massive rise in unemployment, something the country can't afford.
BJP's advocates can no longer take refuge in the global slowdown argument. The global slowdown has been happening for at least three years in some form or the other. Yet, the Indian economy's slowdown has been more recent. In a country with a massive market for domestic consumption alone, such a slowdown is unthinkable. Yet, the government today is forced to devote a lot of energy in terms of furthering and defending its socio-political agenda. This limits the space and the energy for the economic agenda.
Politically, the BJP may be at war with every ideological opponent, especially the so-called liberals and intellectuals, but from an economic perspective, all hands are required on the deck. The underperforming economy, agrarian distress and rising unemployment affects everybody, and as BJP is probably realizing, even politics.
The Indian economy, for the moment, doesn't need division or polarization. It needs a central government that will use all its force to come up with out-of-the-box solutions to revive the ailing economy. With key state elections expected till May 2021, it will do well for the BJP government to adopt a refreshingly new approach for 2020 and beyond. Focus on the economy, the GDP and the creation of maximum employment opportunities both in and outside the government. Leave the cow, the temple, the citizenship issues, etc., for the moment.
(The writer is a journalist with 14 years of experience)