The new normal

by December 20, 2019 0 comments

Did policymakers learn any lessons from the 2008 global crisis? Are they better equipped to rescue the ailing economy? These are some of the points to ponder as 2020 draws near

At the turn of the decade, it is but natural to assess whether global and Indian median living standards and per capita income eroded, improved or stagnated over 10 years? And, more importantly, what are the future economic trends, and are policymakers better equipped after the lessons learnt from the 2008 global crisis to rescue the economy from the brink of recession?

The fallout risks of post-deglobalisation are what economists call the “islandisation of economies.” This has placed the biggest stress on emerging markets and on multinational corporations that are part of the global value chain, leading to lowering of global growth forecasts to below three per cent. Mitigating risks and recalibrating to new power-shifts poses the biggest challenges for experienced central bankers, policymakers and corporates, depending on whether they factor in deglobalisation as a prolonged phenomenon or a transitory shock. However, last week’s breakthrough of the 18-month trade impasse between US and China brings year-end cheer globally, “boosting prospects for global GDP for 2020 by 0.6 per cent. Conversely, a breakdown in talks could drag global output down by 0.1 per cent.” Coming to the Indian context, periods of economic growth and contraction have always been in sync with the global rise and falls. Except that in 2017, growth decelerated due to legacy issues of the previous regime and the shock effects of structural reforms, viewed as “short-term negative, but long term-positive.”

What are the big policy and economic trends at the turn of the decade? Where are the potential opportunities to look for within the crisis? And what are the confidence-building measures the Government can offer to bring the economic growth rate back to a healthy eight per cent pre-crisis level?

Let’s have a look at the answer to these questions. We have an interactive Finance Minister who has set a new trend by coming up with four mini-budgets after her maiden Union Budget. With such real-time interventions, while future budget-making will be an annual event, timely interventions will be a round-the-year phenomenon to expeditiously redress sectoral concerns.

Empirical evidence points to two “new normals” that will perpetuate into the next decade: That sovereign and corporate indebtedness in proportion to the GDP has kept rising unabated since the post-Lehman crisis years, so the rise of leverage will keep growing globally and in India. Even central bankers from the European Central Bank to the IMF have encouraged fiscal expansion, by governments spending more in the hope of reaping economic dividends, regardless of incurring high debt-to-GDP ratios. American corporate debt alone accounts for 70 per cent of this year’s total corporate defaults, while China’s defaults are expected to hit a record high according to S&P Global Ratings.

The other “new normal” is that forecasts for national growth rates will see downward revisions, falling by at least a percentage annually from previous years for another few quarters.

Today, there is a more digital form of globalisation trending, opening the doors for local agro, small and mid-sized enterprises to uplink with the virtual E-commerce marketplace. The digital economy and e-commerce will be the new game-changers. We need to scale up on our digital potential to create equivalents of Google, Facebook and Amazon. These platforms are the future wealth creators. India’s greatest advantage is access to data of 1.2 billion people, four times the size of the US. Leveraging the potential of Digital India can take us towards a $5 trillion economy much faster.

The cleansing and formalisation of the economy that started with demonetisation are a work in progress. Much needs to be done to improve corporate and banking governance standards to clean up balance sheets of PSBs, NBFCs and corporates. As regards banking, there is a need for mandatory evaluation of credit ratings of banks, improved governance and credit-risk monitoring systems, and for the RBI to play a more proactive and vigilant role. The RBI is constrained for lack of access to the inner workings of banks other than a review of balance sheets.

Lowering of interest rates and corporate taxes has not yet led to the revival of Capex or consumer demand, attributed to the economic phenomenon of “hysteresis.” Put simply, this happens when economies take longer to reflate, despite booster shots at revival.

We need to adapt to the new business model of the “sharing economy or on-demand economy.” This has led to the “creation of secondary economics”, to quote the Chairman of World Economic Forum, Klaus Schwab, which is difficult to quantify. Because, “Alibaba, the biggest retailer doesn’t own a single store nor has any inventory build-up; Uber, the largest transportation provider does not own a single vehicle and Facebook, the world’s most popular media owner creates no content.”

Consumer behaviour and altered consumption patterns are being redefined by millennials who account for 51 per cent of the population, and are opting for the sharing economy projected to grow globally by $275 billion over the next five years. There is a generational shift amongst millennials who are opting to lease out living and office space or automobiles, in preference to physically owning an asset.

Due to underemployment and stagnating wages, the working classes find it hard to service EMIs, despite an insatiable demand for affordable housing. Consequently, the housing sector which is one of the prime propellers of growth and has a backlog of 1,600 stalled projects, could take longer to revive despite the infusion of a Rs 25,000 crore fund from the Government, with the SBI and LIC pooling in. Only once real estate activity picks up, will it impact the wages of agricultural labourers, as 50 per cent of rural income comes from realty.

The workforce will have to adapt to gig-employment modules, with more enhanced capabilities and specialised skills. This is because fewer jobs are being created by the organised sector, while 56 per cent of new employment is being generated through the platform-enabled services. A global survey shows that there are 180 platform companies currently valued at $4.5 trillion, which are the new absorbers of the workforce.

Behavioural psychology of consumers in times of “secular stagnation” is manifesting on predictable lines, where “persistent demand shortfalls are not being overcome even if the cost of borrowing lowers to near-zero interest rates.” Till sentiments and disposable incomes improve, the major propeller of growth will rest on increased Government stimulus through MNREGA and increasing spending on infrastructure.

India cannot continue with its policy of “creeping protectionism” with enhancing import tariffs but instead needs to shore up its global competitiveness, lack of which is making it reluctant to participate in Free Trade Agreements with other trading blocs like the European Union. A comprehensive plan towards a $5 trillion economy cannot make up the numbers if our share in world exports languishes at 1.7 per cent.

A recent article highlighted that there has been a year-on-year exodus of capital and calibre out of the country due to a fear psychosis. The Government needs to contain the drain through confidence-building messaging; by reducing areas of frictions for investments; ensuring that the State will be less litigious; bureaucracy will be less discretionary; taxation policies will be more predictable instead of retrogressive and that the biggest employment generators like automobile, airline and telecom sectors are rescued from the brink of collapse.

India has a long way to go in gaining investor confidence and has among the lowest global rankings when it comes to the enforceability of contracts. The biggest uncertainties arise from a frequent change of regimes, as new governments renege on contracts signed by the previous one, like the revocation of the bullet train project in Maharashtra.

This poses a risk to lenders, as also to allied activities of contractors, affecting jobs, suspension of infrastructure projects, and adding to cost overruns. Once the CAG has approved procedures for procurement and pricing is fair, it should be made an irreversible and contractual obligation by the State to honour the same.

To work towards a $5 trillion economy is an arduous task for policymakers, which needs a quantum leap in planning. For a comprehensive revival package, the Government needs to outsource the best “brain-trust pool,” comprising economists, academia and businessmen, as also to evolve a consensus between the swadeshi and Ox-bred economists with minimal contradictions.

(Writer: Bindu Dalmia; Courtesy: The Pioneer)

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