Bugle for more reforms

by May 21, 2020 0 comments

The Corona crisis is about personal and economic survival. This should compel us to regenerate like the proverbial phoenix by discovering creative solutions for revival and recovery

The Prime Minister’s announcement on May 12 of a monetary package of Rs 20 lakh crore to revive the Indian economy presaged a roadmap for the many reforms the Finance Minister would unleash during the five consecutive days. The dominant theme emanating from Prime Minister Narendra Modi’s communication was of Sankalp (oath) to shake off the pandemic — the paralysis of fear that had immobilised the nation since February — to think of a life beyond COVID, roll up our sleeves and get going. Undertones of cautious optimism were much needed as feel-good terms often used by the Prime Minister had receded from his lexicon since the past few months. Take, for example, the creation of “New India”, the recurrent goal-setting reminder of “achieving a $5 trillion economy” or the virtues of harnessing India’s “demographic dividend.” Seasoned economists read Modi’s zest for transformational reforms as his “1991 moment of economic inflection”, aimed at enthusing business sentiment locally and as an aggressive pitch for inbound Foreign Direct Investment (FDI).

Of course, the exigencies that triggered the 1991 reforms were different from the one witnessed this year. Cut to the present, the compulsion for announcing these reforms is entirely different. They have been necessitated due to the pre-COVID overhang of a contracting global and national economy; de-globalisation; the much-anticipated pandemic-led revenue losses to the exchequer; and a pressing need to implement politically sensitive reforms in “land, labour, laws and liquidity” to woo Global Value Chains (GVCs) exiting China. Certainly, this is a finite now-or-never window of opportunity.

Looking at the breakdown of the package, the liquidity support and credit guarantee measures accounted for nearly three-fourths of the economic support package, which was followed by monetary measures at 15 per cent and fiscal support at 10 per cent. Hence, the upfront direct fiscal cost announced remained limited to 1.2 per cent of the Gross Domestic Product (GDP). Exceeding fiscal deficit runs the obvious risk  of downgrade by rating agencies because when debt-to-GDP ratio breaches the 60 per cent mark, sovereign borrowing costs escalate.

When provisioning for higher borrowing, the Government would have to factor  in pre-existing high debt-to-GDP ratio and low tax-to-GDP ratio. It will also have to factor in negative economic growth forecasts for 2020-21 due to stagnant growth and falling revenue estimates. However, as India is not the only country which had to resort to exceed the budget fiscal deficit, rating agencies will be compelled to revise their assessment criteria by gauging each nation’s macro-economic fundamentals and how prudently the money is spent.

The biggest learning from the Corona pandemic for India is to stop looking for leadership or overly rely on the “big two,” China for imports and the US for patronage. It is in this context that the central theme of the Prime Minister’s prescription for “atmanirbharta” or self-resilience and self-reliance is relevant. It falls back on the time-tested Gandhian economics of supporting and building swadeshi brands. With India’s globalisation index as high as 62 per cent, the need is for a paradigm shift. We must lower our dependence on global supply chains.

World over, economic nationalism, which is a self-preservation strategy to build and buy local goods to foster local employment, is being practised. With growing mistrust between nations due to the spread of the pandemic as also the weakening writ of multilateral institutions, globalisation has been in retreat since the past five years.

Modi’s 21st century reinterpretation of “self-reliance” must be viewed as a “hybrid model” of economic nationalism, one that is not overly protectionist or insular to inbound FDI. Nor does “self-sufficiency” here imply a regressive return to the Nehruvian era of import substitution, which mollycoddled the local industry into mediocrity and complacency. Instead, re-packaging “brand” India is as vital as building strong brands.

For “brand” India to attract relocating GVCs, we need to re-position and undertake an image makeover to promote India as a business destination that has an investor-friendly Government with no policy volatilities and has rid itself of a menacing bureaucracy. Because industries exiting China are in the process of due diligence. They are evaluating the risk-rewards of relocation to an Asian country or are ready to cede to US President Donald Trump’s admonition. The likes of Apple are contemplating to relocate to India.

For Indian brands to become a natural “first-choice” for domestic consumers as also to increase our export potential, indigenous products will have to be benchmarked to meet global standards. We also need to maintain a competitive edge in price, quality and delivery. This is highly do-able. Think of traditional brands like Khadi Gramodyog, Amul, Patanjali, Dabur and Bajaj among others, which have become household names today.

The first tranche of the Finance Minister’s relief package was the most pertinent as it sought to infuse Rs 50,000 crore  equity into viable Micro, Small and Medium Enterprises (MSMEs) and disallowed global tenders in Government procurement up to Rs 200 crore. This will increase participation of Small and Medium-sized Enterprises (SMEs) in infrastructure projects, which have an outlay of Rs 100 lakh crore over the next five years. At stake are not just 11 crore jobs but the future of what makes up 45 per cent of the country’s total manufacturing output, 40 per cent of exports, and 30 per cent of the national GDP. However, the above only stimulates the supply side.

To spur demand there exists pent-up demand for non-essentials but potential buyers remain in cash conservation mode. Retail borrowers’ ability to service pre-existing loans remains challenging despite extended moratoriums due to uncertain earning capacity. So even if the industry resumes production at full capacity, there is the risk of inventory build-up, which may lead to dual defaults from both retail borrowers and manufacturers. It may put pressure on the already risk-averse banks despite a 20 per cent Government guarantee to fund MSMEs.

Therefore, initially, only essential-spend services and products defined as catering to the needs of a post-COVID society will be resilient to bounce back. They constitute sunrise sectors, those which will have a higher multiplier effect in creating employment. Hence, funding of these sectors will have a better risk-reward ratio and lower insolvencies. Other gainers will be companies with strong balance sheets. They will be at a vantage to look at distressed assets for acquisitions.

The fastest rebound would come from sectors like IT and telecom, which became indispensable for virtual communications during the lockdown; new-age sectors like fintech and digital payments services that became the contactless method of financial transactions; pharma and FMCG sectors, which supply essential services; e-commerce because it’s the most efficient form of contactless delivery; ed-tech platforms and telemedicine to administer learning and medical consultation; gadgets that are essentials for work  from home like air conditioners, iPads, computers and smartphones among others.

The other propeller of economic activity is expected through the Government-funded affordable housing for both rentals and purchase. India’s $180 billion real estate industry employs 52 million people and contributes six per cent to the GDP. Under PMAY, the affordable housing segment has got an additional fund infusion of Rs 70,000 crore. Also, there are big opportunities for labour-exporting States such as Uttar Pradesh, Bihar, Bengal and Jharkhand to become low-cost manufacturing hubs should they seize the moment by offering lucrative incentives to industries that can help absorb the 14 crore reverse migrants into their own home States.

I end on a reflective note and it is this: When confronted with an existential crisis, we either adapt or perish. Speedy recalibration is needed at multiple levels to adjust to the new normal, whether it’s about shifting towards faceless e-governance models, restructuring previously lucrative business models of the “sharing economy” or even airlines catering to cargo instead of passengers. The crisis is about personal and economic survival. This should compel us to regenerate like the proverbial phoenix by discovering creative solutions for revival and recovery.

(Writer: Bindu Dalmia; Courtesy: The Pioneer)

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