View: Recession door ast?

The most compelling figures of the slowdown contained in the growth figures for the July-September Quarter of 2019 are one, nominal growth at 6.1%, about half the rate assumed while making budget estimates of tax collections, two, an absolute decline in gross fixed capital formation from the April-June quarter of 2019 and, three, the decline in manufacturing output. The trend continues: see the shrinking, by 5.8%, of the core sectors, comprising the likes of coal, oil, gas, electricity, refined products, cement, steel and fertilisers, in October as well.

We can quibble over the definition of a recession and take satisfaction in the fact that India is far away, still, from two consecutive quarters of negative growth. Recession door ast. Or we can try and do something to reverse the slowdown.

If winter comes, can spring be far behind? Won’t such slowdown inevitably be followed by a rebound? Were poet Vajpayee the prime minister now, such philosophic detachment to the crushing distress the slowdown induces in the lives of Indians might have been understandable, if not excusable. Plants are being shut down, people are being laid off, farmers are committing suicide, whether out of economic troubles, as the government’s critics allege, or driven by the melancholy of rustic life. Bank loans go unserviced, bad loans pile up and bank credit shrivels up even further.

India needs proactive policy a little beyond waiting for the inevitable turn of the business cycle. The government appreciates this. That is why it has announced a slew of measures: bank mergers, corporate tax cuts, loan melas and a package for the real estate sector. These are necessary but not sufficient.

Corporate tax cuts reverse the increase in the effective tax rates that had materialised over the first term of the present government. The effective tax rate, after adjusting for all tax holidays, concessions and allowances provided for in the tax code, had gone up from 23% in 2013-14 to over 29% by 2018-19. The government did well to bring this down to a tad over 25%. For manufacturing, the new effective tax rate for new investment is 17%. This could tempt a company seeking to relocate a plant from China and doing the numbers on post-tax returns available in India, Vietnam, Singapore, Thailand and Indonesia. But these would not induce existing industry to set up fresh capacity: industrial production is down and unutilised capacity still well over a fifth of the total.

Bank mergers and the announced reform of creating a market-linked remuneration structure might be desirable in themselves, but do little to boost investment or lending. The merger process actually distracts bankers from their core business of lending. Loan melas add to the harm done to banking culture by repeated loan waivers but do hold out the hope of additional demand for industry’s produce. The Alternate Investment Fund that would provide resources to stalled real estate projects is a good idea, but does not go far enough.

The other thing the government is doing is to privatise public sector enterprises (PSEs). PSEs deserve to exist if they meet two conditions: they meet a strategic requirement of the economy and are doing things that the private sector is incapable of doing. Steel, machine tools, power generation, dams and irrigation canals --- these were essential for India’s industrialisation and rapid economic growth at the time of Independence and beyond the capacity, for the most part, of India’s fledgling private sector. Hence the temples of modern India.

However, what is strategic and the capacity of the private sector both evolve. Neither steelmaking nor refining is beyond the competence of the private sector. Ditto for running an airline or five star hotels. At the same time, new strategic sectors have opened up. The modern economy and defence capability rely crucially on advanced communications. And India is woefully dependent on external technology for telecom. India lacks the capacity to determine if complex telecom gear contains a backdoor that would allow an external agency to carry out surveillance without our knowledge or shut down or disrupt Indian communications. India aspires for strategic autonomy in a world of geopolitical rivalry. Clever diplomacy and bargaining take you quite some distance, but will not substitute for real indigenous technical capability in computing and communications, artificial intelligence, synthetic biology, material sciences, robotics, weapons systems, nuclear fusion research and use of outer space.

India has begun to use the private sector’s capability to meet some of its defence requirements. But the overlap between commercially viable private sector capability and areas of India’s strategic requirement is small. PSEs should be set up to take care of the rest. Vacating sectors that do not call for public sector presence while occupying new priority areas is what should guide disinvestment. If privatisation is done as a desperate measure to raise cash in the short term, the result might be to enrich some private buyer who manages to acquire at a discount a valuable asset built up over the years with public money. Let privatisation continue, but insist on getting a good deal.

The government has to do a few urgent things. It must stop the pretence that it will meet the fiscal deficit target. There is no virtue in letting private savings in excess of private investment lie idle. The government should borrow it and invest it, to create economic activity that would crowd in fresh private investment. The government should borrow to make good its commitment to the states to compensate them for shortfall in GST revenues. States together account for 58% of overall government spending in India. If they do not have money to spend and hold back on expenditure, the squeeze on the economy would intensify.

Stalled projects are of two kinds. One, those that are inherently viable, once shorn of the excess costs they have acquired either due to inflated project costs or because of interest and penalty on unserviced loans. Two, hose that should never have taken off, to begin with.

Every single viable stalled project should be completed. This means separating them from their illiquid or failed promoters, rightsizing their project costs in the process. The government must build special vehicles to buy out the stalled projects from their unviable promoters. The AIF for real estate the government has announced still hopes to get the projects completed by the promoters. This might not be feasible in a great many cases.

Where will the funds come from to finance the buyout of stalled projects? Banks could supply the patient capital required. Or it could be mobilised from the large pools of global savings desperate to get a decent rate of return in a world where some $16 trillion worth of bonds carry negative yields. The government would have to supply the comfort that such investments in Indian special vehicles that buy out stalled projects would generate decent dollar returns.

The government should get the Delhi Mumbai Industrial Corridor project moving and build the towns planned under it. Such construction would generate demand for steel, cement, all kinds of construction material, equipment and labour, and create the towns urbanising India needs.

Even if the government does not muster the courage to address structural problems in power, agriculture, the stunted debt market and opaque political funding that breeds corruption and tolerance of corruption, there is much the government can do to get the economy moving in the short term.

Or the government could also tell itself: recession door ast. After all, the poetic muse smiled on not just Vajpayee. Narendra Modi, too, is known to have written verse.