Originally Published 2020-04-24 10:29:39 Published on Apr 24, 2020
COVID-19 is the flash point which can tip us over the edge. But it was always touch and go. India needs a reset towards resilience.
India needs a haircut

We have needed one since the 2008 global financial crisis when massive fiscal interventions provided the fizz to drag out a functioning economy for the next decade.

This fizz has now run dry, sapped by — corporate freeloaders, who misused the cheap money at the expense of small investors, who naively assumed governance system were in place to avoid fraud by dominant corporate owners.

Policy paralysis has not helped. A glaring one is failing to free agriculture from the trap of administered pricing and non-compete marketing regulations. Some selected policy options lack substance. Our muscular foreign policy provokes the diversion of fiscal and mind space away from domestic challenges towards unsustainable defence budgets. The GST remains cumbersome to comply with and constrained in scope, three years since it was implemented.

Admittedly, the global environment has not been benign either. There is some cheer that our Achilles Heel — oil, has collapsed. But, so has the global economy we feed-off. We are going to miss the inward foreign remittances of $83 billion which will dwindle as Gulf oil hubs and the US cut back on migrant employment.

COVID-19 is the flash point which can tip us over the edge. But it was always touch and go. India needs a reset towards resilience. Three initiatives beckon.

First, use public capital more efficiently. 1992 was supposed to have done that. It did not go far enough. Two thirds of current bank assets are owned by the public sector. It is inconceivable that these can be used independent of the traditional “phone calls” aka “directed lending.” How much longer shall we socialise private losses — that too of the elite?

Fiscal stability remains dodgy. PM Modi is a lucky general. The post 2015 oil price moderation provided the fiscal space to reduce the fiscal deficit. With oil prices collapsing further an opportunity exists to shore up flailing revenues rather than passing through cheap oil to consumers.

Budget FY 2021 should be recast to reflect flat line growth, adjusted tax revenues, a lower revenue deficit of 1.2% (currently 2.7% of GDP) but a higher Fiscal Deficit of 5% (currently 3.5% of GDP).

This implies administratively squeezing revenue spend significantly, borrowing more than earlier but using debt primarily to finance a higher investment spend.

The cap on revenue spend -other than transfers to state governments — should be Rs 17 trillion (Rs 15 trillion revenue earnings plus 1.2% of GDP as debt financed revenue spend) as against Rs 19 trillion targeted earlier — a significant 1% of GDP reduction. Who should bear the pain of the haircut?

Sadly, it must be government staff via a temporary deduction in salary and reduction in office outlays. Staff can be compensated for the temporary dislocation in personal cash flows by depositing the amount in a special emergency (EEE) account — tax exempt at source, on interest and on release. A savings in cash outflow of Rs 1 trillion out of the budgeted Rs 6 trillion on “establishment” with a related increase in “forced” household savings should be targeted.

36 centrally sponsored sector schemes and 685 central sector schemes have collected a great deal of fluff which should be sifted out whilst insulating the key long-term initiatives in health, social protection, and infrastructure.

Examples of frivolous allocations are — skill development, smart cities, subsidy to Air India, FAME, metro projects, IPDP, power sector development fund, space technology, budget support to railways (IR should cut back loss making passenger operations and become self-sufficient), support to infrastructure pipeline, recapitalisation of insurance companies — they should find private equity infusion, the expansive Jal Jeevan Mission and so on. A hard look at allocative efficiency can release Rs 2 trillion out of the allocated Rs 8.4 trillion of revenue expense.

A fiscal crisis is a good for spring cleaning. Strategic sale of public sector enterprises can monetise these assets to fund new capital expenditure in infrastructure. Telecom, aviation, power generation, education and health care are shining examples of high-quality private services today.

Second, at the core of medium-term economic resilience is how much India saves for the future. Our savings rate peaked at 36.8% in 2007-2008 just prior to the global financial crisis. In the decade since it has consistently declined to 30.5% of GDP in 2017-18.

The primary reason for this precipitous decline is reducing household savings whose share in GDP fell from 22.5% to just 17.2%. What does this indicate?

Debt financed booms are transient. The 2009 markets fizz effectively bypassed the 100 million middle class. Dreams of big returns from investment in realty diverted savings to EMI payments for flats that never got built or if they did, there was no demand for rent or resale. Dud investments burnt middle class savings. They continue to do so.

Take steps to increase household savings back to around one quarter of GDP. Make time deposits attractive. RBI should balance the contradiction between the need to reduce the retail bank lending rates to make them internationally competitive for borrowers and the political economy imperative to preserve the savings incentive for the middle class — the backbone of any government.

RBI’s key control metric for banking should be to monitor the time deposit rates and the maximum operational margins for categories of borrowers. There is something wrong if luxury cars are available at zero per cent loans whilst the average home buyer shells out 8.4% per annum when inflation is at less than 3% and the repo rate at 4.4%.

Third, be brutal. Let storied private sector ships sink and sell them to anyone — including our “Bhai’s” across the northern border. Bolster the winners instead for they have the will and the capacity to survive. Jio has shown the way by pulling in $5 billion equity from Facebook. The international partnerships which come with foreign equity reinforce corporate good governance standards in India.

India Inc. needs a haircut as does government. This is a good for both — and let us not shed crocodile tears about the ensuing unemployment or loss of “decent” jobs.

We have no option except to make government asset light. Remember, it is not about buildings anymore. All you need is empowered government officials with a smartphone in their hands, working from home, networked to similarly empowered officials and contracted-in field level, specialised private agencies to deliver results.

Burning the accumulated stacks of government files at Vijay Chowk, as Gandhiji’s “swadeshi” movement did of imported chiffon, could be a cleansing start for a New India.

This commentary originally appeared in The Times of India.

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Sanjeev Ahluwalia

Sanjeev Ahluwalia

Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...

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