Steps to kick-start stalled economy weak

As the coronavirus lockdown entered the second month, the government eased some restrictions, beginning this week. Simultaneously the Reserve Bank of India lowered interest rate on commercial banks deposits with it.

Both the measures are aimed at reviving industrial activity which came to a halt following the lockdown, imposed on a four-hour notice. Industrial units which are not located in Covid hotspots can now resume operations.

The RBI cut its interest rate to induce commercial banks to lend more to businesses instead of parking their funds with it.

All commercial banks, public and private, have lately been saddled with non-performing assets (NPAs), a euphemism for bad debts. To boost lending, the government relaxed the NPA norms. Last month the RBI had made an even bigger cut in its interest rate and set apart Rs 500 billion to increase liquidity.

A second cut in quick succession suggests the RBI’s first step did not yield expected results. It now plans to pump Rs 1,000 billion more to increase loans to industry.

The economic growth rate was at a six-year low when Finance Minister Nirmala Sitharaman presented this year’s budget in Parliament in February.

Critics blamed two government measures, unplanned demonetisation of currency notes and hurried rollout of goods and services tax, for the fall in the growth rate. However, certain factors beyond the government’s control, such as the US-China trade war and high oil prices at an earlier phase, also had contributed to it.

As consumer demand had fallen, hitting manufacturing industries hard, money needed to be put in the hands of the people. Ms. Sitharaman, who had announced stimulus packages to select sectors like the automobile and construction industries, followed them up with readjustment of income-tax rates to ensure that the middle class has more money to spend.

All these steps, however, fell short of expectations and the International Monetary Fund lowered anticipated growth rate for the current financial year to 2.5 per cent, when the lockdown came as a bolt from the blue.

Fitch, the rating agency, which had earlier plugged India’s growth rate estimate at 5.1 per cent, slashed it to a 30-year low of 2 per cent. Barclay’s pitched it at zero per cent.

The bleak forecasts came even as the World Bank identified India and China as two countries which are in a position to weather the gathering recession. The governmental measures are directed towards rescuing corporates in distress. Many of them may face labour shortages when they resume activity.

Migrant workers from poor states constitute a significant part of the industrial labour force.  They suffered the most under the lockdown.

While some states provided relief to stranded migrant workers, the Centre failed to address their problem. A group of Central ministers charged with the task did not come up with any concrete proposals to help them even after five meetings.

The government’s plans to kick-start the economy suffer from a fatal weakness. They are attuned to the needs of big industries, which, as the principal contributor to the election funds of parties, command influence far in excess of their strength.

Unlike other major economies, India has a large unorganised, informal sector, which includes small industries and agriculture.

The corporate sector earns only 12 to 14 per cent of India’s national income. The informal sector accounts for 92 per cent of the workforce, has the largest share of the national income and is a huge foreign exchange earner. But it lacks the clout of the corporate sector and figures only marginally, if at all, in the government’s plans.

Prime Minister Narendra Modi has paid less attention to this sector than his predecessor, Manmohan Singh. For its financial needs, the informal sector depends not primarily on the banks but on non-banking financial corporations (NBFCs).

The government woke up to the vulnerability of Indian institutions last week when the People’s Bank of China raised its stake in HDFC, the country’s largest non-banking mortgage company, from 0.8 per cent to 1.01 per cent through acquisition of shares in the market.

In a knee-jerk reaction it amended the foreign direct investments rules immediately to make prior government approval necessary for investments by entities based in all neighbouring countries.

Earlier only those based in Pakistan and Bangladesh were required to take the government route.

Rather than react to developments, the government must proactively draw up policies to put the economy on an even keel. An economy of India’s kind cannot be revived by spoon-feeding the rich.