Fix the rot in these 3 economic drivers to reverse the slowdown: View
India needs to fix rot in 3 economic drivers—agriculture, investment by industry & credit growth from banks.
Slowdown is the word on every lip. Numbers are tumbling out, showing consumption is dropping and businesses are not making fresh investments. While some warn that the demographic dividend has boomeranged into teeming unemployed youth, others are pointing at slowing exports. Old ways of doing business no longer work. We are yet to figure out how to negotiate the new path.
Consider three important drivers of the economy—agricultural income, investment by industry and credit growth from banks and institutional lending. Without these three, we can’t fix the biggest driver—consumption demand.
Agriculture is a long-neglected segment in India, despite being the source of livelihood for the majority of the population. Agricultural incomes have stagnated, raising fears of rural poverty. We can blame demonetisation and increased curbs on use of cash, since a significant portion of agricultural transactions happen in cash. It accentuated other problems that have not been fixed in a very long time.
We have two layers of anarchy in this segment— the first is the government-sponsored program of buying agricultural produce at pre-fixed prices. This skews everything from what is produced, how and in what quantities. It has also led to mono-cropping, poor water management, overuse of chemicals and largescale wastages at FCI. The lack of formal markets for agricultural produce is further accentuated by systems like the APMC, where fair price to farmers outside government procurement has been denied for years. Add to it the lack of adequate credit systems and insurance, the agricultural economy is set up to fail.
The second layer is the dominance of feudalistic landlords. Apart from being the sole lenders at usurious rates, local mafia controls everything from fertilizer, seed and pesticide distribution, to the APMC yard and ownership of co-operative banks. Since agriculture is still not taxed, the income inequality among rich and poor farmers is deep. Pulling the plug on cash simply led to a collapse of an already weak system.
There are marginal farmers bleeding from the want of adequate credit, insurance and fair price for their produce. Long-term structurally bold solutions will antagonise existing rent seekers and face difficulties in taking the unorganised majority along. Reforms need government action and thought leadership from the agricultural community. We still do not know how that will happen. Indian industry has always been an opportunistic player. From the early days of trying to work around license and permits, to the liberal era of toll roads, mining and spectrum, fair game, ethics and problem-solving have seldom been at play.
Wasteful investments in far-flung areas just to take advantage of tax breaks, unrelated diversification and expansion that wastes capital; formation of multiple entities to indulge in creative accounting; scouting for ways to cheat the system in collusion with political powers; and accessing finances from institutions and banks with the intent to default, while manipulating stock markets have all been practices many businesses have indulged in. That these activities remain unchecked is a matter of concern.
To ask why investments by industry are low is to forget that industry does not see an opportunity at this time that can be exploited with other people’s money.
When the foundations are so weak, it only takes one measure that asks all businesses to declare revenues in full to shake it all up. Impound some of that revenue as tax, and add to it complexity, confusion and operational bottlenecks, you have the recipe for disruption. GST now holds the blame for stalling the business environment.
The problem is lack of innovation, dynamism and problem solving as the core driver of business. Perhaps we are a nation of sly traders more willing to turn money and goods around, than build lasting value.
Many blame the banking system. Before nationalisation, we had a local communitybased system, but it was built on sound lending practices. Our private banks were led by shrewd lenders who knew how to lend and recover. We now have a credit system in shambles, since we replaced that system of sound banking with a system that lacked accountability. After being tested by many reckless governments and politicians, and moving from one crisis to another, we have now reached disintegration.
From IL&FS to PMC Bank, the underlying story is the same. Depositors’ money has been used to favour poor quality borrowers, through a network of collusion and corruption that sidestepped every rational credit process. Weak balance sheets lead to stalled credit and the economic engine halts.
Consider the construction company that is wreaking havoc currently. The builder sells property to individuals willing to fund a portion of it in black, and the rest with home loans. They are willing to pay in advance and wait for delivery. Prices skyrocket from a combination of eager buyers and easy credit. The builder collects advances, funds a bunch of projects using a part of this money as seed capital, and seeks bank loans for the balance. The property the buyer mortgaged and funded, is now re-mortgaged and re-funded against inflated prices. When it collapses, it takes everyone down. Add lower employment and stagnant income of buyers, the weakness is complete.
This is just a glimpse of the rot. We have a broken structure. We need long-term vision and commitment to set the economy on a stronger path, building block by block. Or we need a bottom up corrective action that puts every fresh block on sound footing and resurrects the system over time. Without a national ethos for industry, ethics and fair play, how would we fix this rot?
(The author is Chairperson, Centre for Investment Education and Earning.)