India’s new government has been good overall in its first year, but underperformed relative to its potential and to expectations. Some useful steps taken will bear fruit in the long-run. Among these are attempts to change the composition of government spending towards infrastructure such as road-rail and low cost housing to kick start lagging investment, give more freedoms for states, resolve issues of coal supply for power plants using auctions, reduce the number of forms exporters as part of making business easier to do in a non-discretionary, corruption-free way, take some action on financial inclusion and on better targeting and delivering subsidies.
The list is long but the inability to address short-term constraints such as weakening domestic and foreign demand, and the fear of recurrent food inflation despite some easing, has meant the economy continues to stagnate. It is good to resolve major long-run constraints but a neglected short-run can persist into the long-run and become difficult to reverse. There is also not enough action on a major bottleneck-systemic weaknesses in government administration.
Feel good maybe fading, but the fall in Indian equity prices should not be read as a judgment on the government. The major reason for the fall is external rather than internal, since India’s medium-term story is still one of the best worldwide. Global fragility, a rebalancing to China because of its monetary stimulus, and the recent recovery in oil prices, are seen as negative for India. But oil prices are unlikely to rise to earlier levels because of geographical diversification in supply, and more elastic sources of supply that reduce the power of oil cartels. Too large a fall in oil prices, moreover, has adverse effects even for net oil importers like India.
For example, export demand is adversely affected, and a squeeze on higher cost oil suppliers can imply a larger future rise in oil prices. A moderate rise, therefore, to a level that can be better sustained is not negative for India. If outflows help a mild depreciation of the rupee that corrects for real appreciation it will aid exports, and will not be inflationary since oil and other commodity prices are still on the softer side.
Macroeconomic policy should stay focused on the domestic cycle, finding ways to become robust to constant external shocks and pressures. More focus on facilitating India’s unique opportunities would pay off. The most significant of these is the advantage of skilled youth, together with technological changes that give them the opportunity for entrepreneurship and innovation. The ongoing net neutrality debate illustrates this. A large number of young people entered the debate, asking for net neutrality rather than for a subsidized Internet, because the first favours entrepreneurship. They want opportunities to create new businesses. Youth overwhelmingly voted this government into power and expect an appropriate response.
Such a demographic profile implies a large potential domestic market, especially valuable in a global slowdown. Aging populations and slowing growth worldwide will bring large FDI to India provided obstacles to doing business are removed. This will help India move up the value chain and compete in international markets.
It follows skills and infrastructure, including Internet related infrastructure and its penetration, have to be improved, even as transaction costs are reduced and better quality public services provided. To achieve all this, the composition of public expenditure has to be changed, legal/ regulatory/tax structures simplified, the administration streamlined with overlaps removed. Administrative and logistic delays are part of the constraints that prevent India becoming a part of global supply chains and expanding exports.
As the government continues to vigorously address the marketing and infrastructure constraints that affect food inflation and create periodic agrarian distress, it must clearly explain why the factors bringing food inflation down are likely to persist. Soft global food prices have helped keep rise in cereal support prices low over the past two years and allowed farmers to diversify to produce the vegetables, fruits and proteins that are in demand. Moderating rural wage growth and the oil price fall are reducing costs that improvements in infrastructure will sustain. If inflation fears are assuaged interest rates can fall and stimulate consumer and investment demand.
The government has to work better with other parties on important legislation. It should also better publicize its dialogues with States on the Land Acquisition Bill, and their feedback on its working. Recent reports suggest that only 8 per cent of projects are delayed because of land and a large percentage of land acquired is unutilized, for example in the SEZs. Therefore the Bill is not so urgent and there is space to have more discussion with stakeholders.
As the government becomes a facilitator, others must also step up. Corporates would help themselves and the country if they focused on frugal innovation in products and processes that meet customer needs. Improvements need to be deep and systemic, not just on the surface. Redesigning processes for better quality would remove inefficiencies and reduce costs. Low cost yet high quality products will find markets abroad also. Corporate social responsibility is mandated in the new Company Act. If used to contribute to skill development, environment and infrastructure, it can reduce firms’ input costs and make them more accepted as trusted and recognizable brands.
These steps will lead to ‘active inclusion’ that will allow more and more to participate in opportunities, while creating jobs for the lower skill segment also, in both manufacturing and in a range of services.