The NDA has its task cut out

Indian voters have shown remarkable maturity and thoughtfulness in delivering a stable government at the Centre. They realise the necessity of a stable government, and so often vote differently in national and State elections. Forecasts of political and economic instability made in 2014, when the macro economy was vulnerable, proved incorrect. Similar forecasts were made this year, based on the Bharatiya Janata Party (BJP)-led National Democratic Alliance’s losses in the Karnataka, Madhya Pradesh and Rajasthan Assembly elections. The pundits should bow to the greater wisdom of the people — in this election, the BJP has swept the same States.


The Congress underestimated the voters’ continuing need for good governance. The Congress did not choose dynamic Chief Ministers when it had the option. It also underestimated the voters’ need for a positive narrative. Talking of slow job growth and farmer distress did not work. The Nyuntam Aay Yojana scheme (the Congress’s proposed social welfare programme) was not acceptable as a substitute for jobs.

On the other hand, the BJP promised to improve ease of living, beyond just the ease of doing business, and strengthen the self-respect and ability of the average citizen to do more, which is exactly the right approach for an aspirational India.


Bringing life to poll promises

There was fear of competitive populism in the event of a weak government being elected at the Centre. Now the BJP will hopefully focus, as promised in its manifesto, on infrastructure, housing, technology, health, education, water, the environment, and facilitate the move away from agricultural jobs to raise farmer incomes. Only 23% of rural income now comes from farming, and there is a major ongoing shift to add value in agriculture. Apart from this, administrative reforms should be the focus. There are police and judicial reforms on the anvil. Well-targeted direct benefit transfers will efficiently deliver relief to the really distressed at low cost.


And what about the economy? The slow growth of jobs was largely due to strict monetary and credit policies that started in 2011. International monetary theories were not adapted as required in the Indian context. The inherited non-performing assets (NPA) burden dragged on. Since major loans had gone to private business, a bankruptcy regime had to be put in place, to prevent the entire burden of resolution from falling on tax payers.

But today, with some clean-up, inflation is below the target set by the Reserve Bank of India (RBI). There is still stress in the non-banking financial companies (NBFC) sector. The government must move fast to nip this in the bud and support growth.

Private investment growth has stagnated since 2011. There was a brief recovery of animal spirits after the last election, but high real interest rates and the asset quality review made bank lending to firms negative and squeezed out the revival. Something similar should not happen this time. Policymakers may believe that private investment will revive now and foreign money will pour in. But the latest data show a fall in private investment as real interest rates have risen and liquidity remains tight. There are also external shocks from the global slowdown and trade wars.

A wider tax base

Although the RBI is now keeping short-term liquidity in surplus, banks scarred by a long battle with NPAs are just parking them with the RBI instead of increasing lending. If the share of durable liquidity is increased, it will encourage banks to lend and also bring down market rates. Despite RBI permissions, banks are not lending to NBFCs, since they are afraid of having to make provisions. A full recapitalisation of banks, possible now with bankruptcy and governance reforms in place, will increase their confidence.


The RBI does not want to open a special liquidity window to NBFCs because of credit risk. It believes weaker NBFCs should be allowed to exit. But NBFCs were financing consumption growth and real estate, which are slowing, creating systemic risk, against which the RBI has to act. Even stronger NBFCs, in the current environment, are choosing to sit on a fat liquidity cushion rather than lend. If an RBI liquidity window is made available against collateral with high rates, it may not be used much, but fear of liquidity shortage would disappear, allowing NBFC lending to revive. This is required also because fiscal space, though it is there, is limited. Demonetisation and the Goods and Services Tax (GST) have increased the tax base, reducing rampant tax evasion. Despite simplifications and tax cuts, the tax base is expected to raise more revenue post-elections. Unspent government cash balances will be spent as the spending slowdown is reversed. Money from completed schemes can be reallocated.

Humility should come with strength. After an exceptionally bitter election season, the NDA will hopefully follow a constructive and inclusive agenda and encourage moderate progressive stances. Institutions are the backbone of any economy and must be strengthened. The people know the government took difficult decisions to clean up the system, and chose to give it a second chance. It is time to meet their expectations.

Ashima Goyal is on the Prime Minister’s Economic Advisory Council

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Printable version | Oct 23, 2020 3:14:54 AM |

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