Continuing the debate on growth slowdown from yesterday (see here),
I would argue that the economic growth trends in an economy like India (which
is large, diverse and runs a multiparty democratic system) would usually take a
longer time to establish. It would be unreasonable to attribute the slow down
or acceleration in growth completely to any plan, strategy, measure (legislative
or administrative) etc that has been implemented in recent times.
Construction of core infrastructure like power plants, highways,
ports, coal mines, etc usually entails a long gestation period that in many
extends to more than 5yrs (full term of a government). The full impact of these
projects on growth is therefore felt only after these are completed and
commissioned. The current acceleration in growth therefore is mostly result of
the efforts made in past many years. Similarly, a significant change in the
economy like (i) opening more sectors to global competition; (ii) withdrawal of
subsidies; (iii) GST etc would usually have immediate adverse impact on the
weaker/smaller businesses, employment, asset quality of lenders, consumption,
savings, growth rate etc. However, the positive results of these measures would
be felt only after some years.
Therefore, in my view attributing acceleration or deceleration
in short term growth to the incumbent government is inappropriate,
notwithstanding the political rhetoric.
I have said it many times before, and would like to reiterate
that the economic policy direction of all government in past 35yrs has remained
mostly the same. All governments have pursued the same agenda of
liberalization, globalization, inclusion and social equity. For example
consider the following:
1. The process of
meaningful tax reforms was started by the then finance minister V. P. Singh
(Congress 1984-89) by rationalizing the tax slabs, lowering maximum marginal
tax rates substantially, rationalizing wealth tax and introducing CENVAT. The
recommendations of Raja J. Chelliah Committee (1991-93) on tax reforms
constituted by the government (Congress 1991-96) have since formed the basis of
tax reforms in India. All successive governments have implemented these
recommendations. No government has sought to reverse or alter the process
started by Congress government (1984-89). These recommendations formed the core
of all the versions of Direct Tax Code. The origin of the tax proposal like
lower tax rate with lesser exemptions and no wealth tax proposed in could also
be traced to that.
Committees formed under the chairmanship of other members of
Raja Chelliah committee like Govinda Rao, Partha Shome and Vijay kelkar etc.
subsequently updated the recommendations to provide further impetus to the
entire process of tax reforms in the country.
It was the Finance Minister of H. D. Devegoda led United Front
government who presented the most talked about "dream budget".
2. The recommendations of
Narsimham Committee (1991-92) appointed by Dr. Manmohan Singh, the then finance
minister in the Congress government, have largely formed the basis of financial
and banking sector reforms in the country. Most successive governments have
implemented the recommendations consistently. In fact, P. Chidambram, the then
finance minister in United Front government (1998) had re-appointed the
Narsimham Committee to make recommendations about the second generation banking
sector reforms. The report was submitted in 1999 to the NDA government which
accepted the recommendations.
3. In 1991-92, the then
government moved decisively to end the distinct socialist bias in the economic
policy, that constricted India's economic development and integration of
India's economy with the global economy.
Economy and markets were opened for foreign investors. Forex
regime was liberalized under LERMS. MRTP restrictions were materially eased.
Under new industrial policy a large number of industries and sectors were freed
from licensing requirements. Capital controls were substantially eased, and
office of capital controller (CCI) was abolished. Capital markets were
liberalized. SEBI and NSE were established. The role of public sector was
redefined and the process of disinvesting government stake in PSEs initiated.
Civil aviation and telecom sectors were opened to private sector. New age
private banks were allowed to operate as full service operators. Election
process was dramatically improved and enhanced. WTO membership in 1995 also
changed a lot of things for India.
Then during 1998-2004, another Reset was effected the
government, taking the process started in 1991-92 to a much higher orbit.
The government gave up most of its monopolies. Private sector
participation, in core sectors like coal, power, roads & highways, oil
& gas, insurance, etc. was allowed. Digital connectivity was provided a
massive thrust through New Telecom Policy, along with road and rail
connectivity. PM rural road program (PMGSY) has been one of the best government
programs in independent India. National connectivity projects like development
of Golden Quadrilateral under PPP model, Delhi Metro Rail Project (that became
a role model for many mass rapid transport systems (MRTS) in India and abroad,
were initiated. The process of disinvestment in PSEs was enhanced
substantially. Sarva Siksha Abhiyan was a massive effort (and successful) to
bring children to school.
4. The BJP led NDA
government enacted the Fiscal Responsibility and Budget Management Act (FRBMA)
in 2003. The arch rival Congress led UPA-I government implemented the same in
2004 in letter and spirit. This still forms the very basic of fiscal discipline
both at central and state levels, though implementation was suspended in 2009
in the wake of global crisis and need for stimulus. In FY13 stimulus withdrawal
commenced and all subsequent Finance Ministers have committed to achieve the
targets without fail.
5. The minority government
of Chandrashekhar introduced disinvestment policy first time in 1991. Every
successive government since then has not only accepted the policy in principle
but also tried to actively integrate it into the evolving economic model.
Almost all of them have consistently failed in implementing the policy in right
spirit.
6. The idea of single national
market (GST) was mooted by the UPA-1 government as a natural progression from
VAT regime implemented during NDA-1 regime. The NDA-2 government implemented
the idea.
The point is that the Reset of 1990s did not result in growth
acceleration till FY2004. The reform measures in fact resulted in material
growth deceleration as there was huge rise in Bank NPAs; two major DFIs (ICICI
and IDBI) were eliminated, the third one (IFCI) was decimated; the largest DII
UTI was eliminated; all private airlines faced closer or sell out; many new age
banks had to be merged with larger peers; thousands of unviable steel and
cement plants had to b shut down; many textile mills went out of business;
unemployment rose to new heights and BoP worsened.
The eventual outcome was a strong new economy which is -
globally competitive in areas like ITeS, Automobile, Pharmaceutical, etc.;
interconnected through a wide network of highways; sufficient in power
production capacity to fuel growth; a recognized nuclear & space power commanding
respect from all significant global players; an attractive market for global
automobile and appliance manufacturers; a preferred investment destination
amongst emerging market peers.
The period from 2004-2010 witnessed significant rise in long term
growth trend, before the global financial crisis changed many things and
warranted another reset. That reset began from 2013 and still continues. This
period has seen significant deceleration in growth. The existence of many
businesses is threatened. The unemployment is high and rising. The financial
stress has remain elevated.
But the expected outcome would be a transparent, strong and much
less riskier financial system; globally accepted business and accounting
practices; stronger, larger and scalable businesses; higher number of organized
sector employment opportunities; improved infrastructure; strong and widely
acceptable business failure framework.
Insofar as the long term growth trend is concerned, as evident from
the below chart, the deceleration started from FY08 and continues. In my view,
it will bottom in next two years at much higher level than FY03 level. The
acceleration from FY22 onward may also surpass the FY08 peaks; and the uptrend
shall last much longer than the previous 5yr (FY04 to FY08) period.
The key risk is failure of the government in securing the
confidence of people, especially the youth. A widespread civil unrest against
the establishment (not likely in my view) may invalidate my hypothesis
completely.
To continue tomorrow.
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