A hard slog ahead for the Modi government

“All politicians should have three hats— one for throwing into the ring, one for talking through, and one for pulling rabbits out of it if elected.”

American writer Carl August Sandburg’s famous lines could well have been written for Indian Prime Minister Narendra Modi as he gears up for another five years of government. Now that the Bharatiya Janata Party leader has been elected for a second time, he will need to wear his third hat to pull out all the rabbits he can to fix the country’s economic problems.

Sure, Modi has won by a bigger margin this time: His party has 303 of 543 elected members in the Lok Sabha, more than the 282 in 2014. Stock markets were delighted with his win, but the real slog begins now because the country’s economic woes have not only multiplied but become more complex in these five years. GDP growth has fallen to 6.8% in FY19 from 8.2% in FY17 because of a consumption slowdown amid an agricultural crisis and a shortage of jobs. To add to these problems is a liquidity problem that threatens to derail many non-banking financial companies (NBFCs) and housing finance companies following the IL&FS crisis.

Putting the stuttering economy back on track is even tougher because the government faces these multiple challenges at a time when the U.S.-China trade war threatens to disrupt the global order, putting both exporters and importers at risk. Rising crude oil prices and a shortfall in tax collections, especially in indirect taxes after the implementation of the goods and services tax (GST), have only piled more pressure on the economy. “The recent signs of slowdown in the economy stem not only from slow growth in investments and subdued exports but also from weakening growth in consumption demand,” industry body Federation of Indian Chambers of Commerce & Industry (FICCI) said in a statement. “This is a matter of serious concern and if not addressed urgently, the repercussions would be long term.”

So, what does the Modi government need to do in the first 100 days to reignite the growth momentum while ensuring the 3.4% fiscal deficit target is not breached? Most analysts believe tackling the liquidity crisis is critical to reviving the flagging economy. “The RBI needs to open a special borrowing window for the NBFCs to help them tide over the current liquidity crisis, which is not only hurting the country’s growth but also impacting its consumption story,” says Sunil Sinha, principal economist at credit rating agency India Ratings and Research.

Shubhada Rao, chief economist at YES Bank, adds that the NBFC sector should be a policy priority as it accounts for over 20% of the incremental credit flow into the country, especially to small- and medium-size industries and retail investors. “We believe a comprehensive policy response encompassing the ministry of finance, the Reserve Bank of India, and the Securities and Exchange Board of India would be required for accurate diagnosis, recognition and time-bound resolution of the current problems,” she says.

Finding a solution to the agrarian crisis is crucial to boost sagging consumption. The government needs to refocus the Pradhan Mantri Annadata Aay SanraksHan Abhiyan or PM-AASHA scheme unveiled last year to shore up prices farmers get for their produce after prices of many commodities fell below the minimum support price (MSP). The scheme allows nodal agencies such as the National Agricultural Cooperative Marketing Federation of India (NAFED) and Food Corporation of India (FCI) to buy cereals, pulses, oilseeds, etc. directly from the farmers at the MSP. “This has become imperative because during bumper harvests farmers get lower prices in the mandis than those notified as MSP, because of the glut in the markets,” says Sinha. Moreover, the new government should fulfil its manifesto promise of expanding the scope of the income transfer scheme for small and marginal farmers to all farmers.

The government needs to introduce land and labour reforms to kick-start manufacturing and attract foreign investors. Delays in land acquisition and old labour laws have dragged down the manufacturing sector, which accounts for 16% of the economy.

Recapitalising loss-making public sector banks (PSBs) too should top the government’s priority list. As the economy recovers, demand for more funds both from infrastructure developers and private sector players, either for brownfield or greenfield projects, will intensify and banks will play a bigger role. The government can turn to the Bimal Jalan committee looking at the RBI’s surplus reserves that can be transferred to the government without stoking inflation. According to a Bank of America Merrill Lynch report, the Jalan committee may identify up to ₹3 lakh crore of reserves for bank recapitalisation.

The third 25-basis point cut in interest rates announced by the RBI on June 6 can spur spending and boost growth in Asia’s third-largest economy. The rate cut can put more money in the hands of the people and reduce the debt burden of companies, who will then be enthused to invest more. The RBI had scope to cut interest rates as inflation has been benign. A study by broking firm Elara Securities shows that “the real interest rate (measured as repo rate minus retail inflation) has increased systematically from 1.17% in April 2018 to 3.08% in April 2019”.

Apart from putting more money in the hands of people, the government needs to shore up its own finances. To bridge the shortfall in tax collections, it should bring real estate, fuel products, tobacco, and liquor items under the expanded GST list. YES Bank’s Rao believes this “will unleash the full potential benefit of GST to both the end consumer and the tax collector”. Kick-starting the disinvestment programme, which has moved in fits and starts, will also bring more funds to the exchequer.

But all this might not be so easy. When Modi took over in 2014, global oil prices had slumped to record lows. This time, crude prices are up again. The Prime Minister will need to pull a rabbit or two out of his hat.

This story was originally published in the June 15-September 14 special issue of the magazine.