Incremental changes in economy

Jayshree Sengupta

Of all the things that have happened on the economic front, Prime Minister Modi’s moves on the social sector insurance policy for the poor stands out as an outstanding achievement. The Pradhan Mantri Suraksha Bima Yojana, the Paradhan Mantri Jeevan Jyoti Yojana and the Atal Pension Yojana have given hope to the poor because they can now be insured against accident, old age and death. Jan Dhan Yojana has created nearly 15 crore bank accounts though more than half have a zero balance.

There have been incremental changes elsewhere and a noticeable deterioration on the agricultural front. The increase in the number of farmer suicides calls for an immediate action, especially in making farming a more profitable and stable activity. In a recent interview M.S. Swaminathan, a noted agriculture specialist, said that the new formula at which the MSP was being calculated should be amended and more allowance for better returns to the farmer should be made (at least 50 per cent above costs). In other words, he has proposed that the MSP for wheat and rice should be raised. Food grain output is likely to shrink by 5.3 per cent this year.

Agriculture distress as measured by farm output, rural wages and tractor sales indicates that all are going down. Even MGNREGS, the scheme which guaranteed work for the jobless rural population, has seen a decline. 

 The economy, according to noted economist Jagdish Bhagwati, is, however, not looking bad and the pace of reforms is correct.  The sharp fall in the Wholesale Price Index to negative 2.3 per cent has been hailed as a great achievement of the government. The retail price index (CPI) has come down to a low of 4.87 per cent. But negative inflation is an ominous sign and there can be a fear of deflation due to lack of domestic and external demand that would lead to unemployment. This deflationary trend is now a global phenomenon and needs stimulus packages like interest rate cuts for reviving demand.

The Index of Industrial Production (IIP) recovered to 5 per cent in February 2015 but was again low at 2.1 per cent in March. For 2014-15  the IIP was at 2.8 per cent which is a small recovery from a negative growth of 2013-14 but it is hardly a sign of vigorous industrial activity! 

Reflecting the slowdown in manufacturing is the data on net profits of the corporate sector which has grown by only 1 to 2 per cent. The banking sector is also not showing great results and a mixed picture of profits is emerging. Non-performing assets (NPAs) of banks have continued to grow and credit growth has fallen to 10 per cent.  India needs to raise $200 billion by 2020 to recapitalise its financial system.

The overall impression about the economy is that of a one-man show and highly centralised decision-making. Recently Modi was on the cover of The Economist which called him India’s “one-man band”. The liberalisation of the economy that Modi promised and was much hoped for, has come albeit in small steps and only in the opening of the railways, defence and insurance sectors. The promised bankruptcy law has not come about and the goods and services tax (GST) and land acquisition Bill are awaiting approval by the Rajya Sabha where the NDA does not have a majority. 

Infrastructual spending has increased and the government has cleared projects worth Rs 6 lakh crore. But the main promise on the job front of the Modi government has not shown much progress. Just 1.17 lakh new jobs were created in eight key sectors of the economy between October and December 2014, according to the recent 24th Labour Bureau survey. In contrast 1.58 lakh jobs were created in the previous quarter ending September 30, 2014 and 1.82 lakh jobs in April and June 2014. 

Automobile sales are rising slowly and many jobs were lost in both the automobile and metal sectors.  Since exports have fallen for five consecutive months, new job creation has been slow in manufacturing. In the last quarter only 35,000 jobs were created in the export sector as against 82,000 jobs in non-export units. 

There has been a large amount of FIIs selling, including the selling of rupee debt due to problems in the collection of MAT (Minimum Alternate Tax) from FIIs. The income tax department has sent notices to only 68 FIIs for the non-payment of MAT amounting to Rs 600 crore. MAT is now under the scrutiny of an expert committee.

FDI, however, has increased and one-window clearances have been announced to attract more FDI and Modi's own road shows in various developed countries have probably made an impact on potential investors. Modi is trying hard to improve India’s ranking on the World Bank’s index of “Ease of Doing Business” by cutting down red tape and bureaucratic hassles. Many, however, are adopting a 'wait-and-watch' attitude till the whole picture becomes clearer about India's GDP growth rate, although the official forecast remains at 7.5 per cent.

The IMF and the World Bank are impressed by the Finance Minsiter's ability to control the fiscal deficit at 4 per cent. But this has been done at the cost of cutting social expenditure for which the government has received much flak already from various quarters. It is the lowest in terms of percentage of the GDP since 2010. The social sector deserves much more attention, especially health, education and skill development. Only 2 per cent of the population has skills and the quality of education requires much more improvement. The vacancies are plenty but there are not enough people who can meet the job requirements. That is the anomaly of the job situation today. 

Much has been said in the Western media about Modi not being able to change the archaic labour laws. This, according to them, will bring about a lot of flexibility to the corporate sector but the government is probably weighing the political costs involved in taking such a bold step. There is also the need for greater labour utilisation in India which will be the key to its success as the ‘manufacturer of the world’ replacing China.