During the first five years of Modi – government i.e. 2014-15 to 2018-19, GDP [gross domestic product] grew @7.5% on an average. However, during the first and second quarter of current year, growth has slipped to 5% and 4.5% respectively. Actually, it started moving on a downward trajectory from the third quarter of last year when it was 6.6% followed by 5.8% in the fourth quarter. The average for these 4 quarters [3rd and 4th quarter of 2018-19 and 1st and 2nd quarter of current year] works out to about 5.5%.
In comparison with the impressive growth recorded over a 5 year period, this is a significant dip of 2% but can’t be termed by any stretch of imagination as a big set-back as opined by opposition parties and some commentators. They even opine that the economy is heading for a prolonged slowdown which is structural. These observations are not in sync with ground reality.
On a number of occasions in the past, the protagonists of gloom and doom have been proved wrong. In the early 90s when, the then government under PV Narasimha Rao had unleashed a wave of economic reforms and liberalization, the critics had forecast sharp deceleration in growth. They were proved wrong as during 1992-93 to 1999-2000, the growth was an impressive 6.4%. This was despite the East Asian currency crisis. During 2000-01 to 2002-03, when growth slipped to an average of 4.1%, the doomsayers became active. They were proved wrong yet again when during 2003-04, growth jumped to about 8%.
In the wake of massive global financial crisis in 2007-08, even as growth plummeted to below 5% during 2008-09, critics once again started brow beating about prolonged slowdown. Yet, growth resurrected to an average of 8.5% during 2009-10 to 2011-12. After dipping for two years [2012-13 and 2013-14] to less than 6%, growth registered an impressive average 7.5% during 2014-15 to 2018-19.
The experience of last three decades thus clearly demonstrates that deceleration in a couple of years was followed by an upsurge. Going by these trends, it would be preposterous to argue that the decline seen during four quarters will continue.
At the outset, it should be noted that considering the global slowdown [Moody Investors Service has reduced its forecast for world economic growth for 2019 from 3.3% issued in April to 3% now] as also the high non-performing assets [NPAs] afflicting banks and non-bank finance companies [NBFC] – both exercising dampening effect on growth – even the reduced average of 5.5% for the period October 1, 2018 to September 30, 2019 is creditable.
That apart, looking at a number of transformative reforms undertaken by the present government, one gets a sense that all the cylinders crucial to catapulting the economy to a high growth trajectory [minimum 8% plus] have been fired. The four factors crucial to success of an enterprise are capital, labor, land and demand. The reforms have impinged on all these factors positively.
On capital, the government has reformed both the equity and debt markets including allowing foreign direct investment [FDI] on automatic route in majority of the sectors. It has made drastic changes in taxation regime [steep reduction in the rate of corporate tax for new entities from existing 25% to 15% and for existing firms from 30% to 22%] to give a boost to internal surpluses and increase investment. It has carved out special dispensation – including inter alia fiscal incentives – for giving a boost to start-ups and micro, small and medium enterprises [MSMEs]. Together with steps to improve ease of doing business [now, new registration can be obtained in 1-2 days], this will give impetus to inclusive growth and create millions of jobs.
Earlier, if a firm was not doing well [say, due to mis-management or promoter taking recourse to diversion of funds] and unable to pay back, there was no way the lenders could recover, nor it was possible to change the promoters. The subsisting eco-system did not even permit liquidation of the firm. This led to capital erosion and impaired the ability of banks to lend. Under Modi, with enactment of Insolvency and Bankruptcy Code [IBC], all this has changed. The banks can now drag defaulting borrower to the court and recover the money in a time bound manner. It is also possible to transfer control of the company to a good promoter [takeover of Bhushan Steel by Tata Steel and Essar Steel by ArcelorMittal are good examples].
This transformative reform alone has the potential to adequately oil the wheels of the economy by conserving capital, helping businesses grow and ensuring that maximum value is realized even in an extreme situation of it being pushed to liquidation.
As regards labor, until hitherto, firms were reluctant to hire workers fearing that once taken, they will have to be retained ‘permanently’ and won’t be able to retrench even when there is downturn in business. The government has addressed this by approving an industrial relations code [IRC]. This allows companies to hire workers on contract, while at the same time ensuring that contractual workers are treated on par with permanent ones. It also gives flexibility to companies or units that employ up to 100 workers to fire them or even close shop without seeking permission of the government [for nine states including heavily industrialized ones such as Haryana, Gujarat, and Maharashtra, the threshold is higher at 300]. It also puts in place a mechanism for speedier settlement and redressal of labor disputes.
Successive political dispensations have dared not touch this area in view of labor being a major vote bank and fear of being punished in elections if a law is made to give greater freedom to the management for acting against them. Modi has shown the gumption to make such a bold move thereby addressing a major bottleneck.
Coming to land, during the initial years of its first term, Modi – government had brought in legislation to amend subsisting land laws. If, enacted, this would have substantially eased the process of acquiring land even while adequately taking care of the interest of persons whose land is acquired [by giving attractive compensation and other benefits such as resettlement and provision of job for locals]. But, it was forced to withdraw the amendment due to opposition particularly from the grand old party in Rajya Sabha [upper house].
The archaic land laws especially after the amendment enacted by the erstwhile government under UPA in 2013-14 are a major bottleneck in the way of acquiring land. This causes delays [in many cases several years] and steep escalation in project cost. Several expressways, highways and road projects have got stuck due to this factor alone. Hopefully, when the numbers for BJP in RS improve, Modi – government will bring necessary amendment.
Finally, on the demand side [touted as the most crucial factor coming in the way of increasing growth and jobs], the efforts made by the ruling dispensation can’t be glossed over. While, on one hand, it has ‘lowered’ and ‘simplified’ the indirect tax regime by implementing GST [Goods and Services Tax] on the other, the income tax rate has also been reduced especially those in the middle and lower income range [a person earning up to Rs 500,000/- doesn’t have to pay tax] so that they have more purchasing power.
The self-employed and small businesses have also been given a concessional tax regime on their profits [under presumptive tax scheme, persons with turnover below a threshold need pay tax on presumed income @6% of turnover].The finance minister has also hinted at more benefits on the direct tax front in the upcoming budget slated for February 1, 2020.
Another source of boosting demand is increase in credit availability from banks and NBFCs. These institutions were in serious trouble; courtesy legacy issues. The government has made serious efforts to reinvigorate both vide a series of measures – besides IBC – such as recapitalization of banks, financial support to NBFCs, customized steps to resurrect the real estate sector etc. The impact of these on discretionary spending viz. automobiles, household durable ACs, refrigerators etc should be felt from next year.
Team Modi has worked on all the 4 drivers viz. land, capital, labor and demand to put India on high growth track. If, critics have something better to offer, they should come up with constructive ideas instead of indulging in rhetoric.