Something similar is happening to the discussion surrounding the latest Indian quarterly GDP numbers. As expected the second quarter GDP number was a negative number. The extent of the recovery from the steep 23.9% drop in the first quarter was a surprise with GDP falling 7.5% in the second quarter compared with expectations of 8-9% plus drop. Agriculture grew, manufacturing recorded a positive growth and amidst all the cheer, the fact that we have entered the first recession since quarterly reporting began in 1996 was pushed to the sidelines.
Actually, this is a good thing. Recession talk now is meaningless. Not because it is not real or does not hurt people but because it is a product of an extraordinary, once-in-a-generation nature of the pandemic that is now raging across much of the world. Covid-19’s virulence in India and the havoc it wreaked for six months before cases started dropping means that any meaningful recovery that could lead to positive GDP growth this year is not possible and we will have to wait until next year’s first quarter. Most brokerages, rating agencies began upgrading India’s numbers after Friday’s data and it is possible that we will end the year with -7% or -6% number. It could be lower if the fourth quarter numbers are better. Most industrialists, investors believe that this year will be a washout. Stock prices are already pricing in earnings growth for FY22 or FY23 and industrialists are also banking on a recovery only next year. Given the kind of suffocating lockdown India had, expecting anything other than a negative number for the full year would be unwise.
So, it is best to look beyond GDP numbers if you want to focus on what kind of economic growth we wish to have and how we can fulfill our collective desire to lift millions more out of poverty and destitution.
What is important from this perspective is not the extent of the recession (unless it becomes severe and prolongs into next year) but what kind of reforms could take us into the stratosphere and get us close to the $5 trillion GDP mark by 2024.
Since last September, India has launched five major reforms/initiatives to kickstart growth and drive prosperity. They include corporate tax cuts, production linked incentives for manufacturing investments in select industries, farm reforms, privatization and a massive infrastructure push. Taken separately, they may be significant all right, but their importance goes up when you look at them together as part of a composite package aimed at unshackling entrepreneurship and businesses and fostering growth along with the right kind of tax incentives.
Take for example corporate tax cuts. On its own, it is a meaningful, deep-seated reform but it becomes big and significantly more important if you link it with India’s ability to attract investments under the PLI scheme. Last year, there was no China scare and no major rush to move industries and businesses away from China. Cutting corporate taxes seemed bit of a gamble but that’s not so this year.
The reluctance of many multinationals to put all their eggs in the China basket after the Covid scare means that they were on the lookout for new countries to shift their manufacturing base. Enter India, not only with one of the lowest corporate tax rates in Asia but also with production linked incentives for various sectors.
Now, it is not very clear whether the scheme will be a success for other sectors like textiles, chemicals and drugs like it has been for electronics. But what this has done is to make India competitive when it comes taxation policy for multinationals. We may still have some distance to go when it comes to doing away with onerous local-level regulations and paper work but a significant reform is being achieved on an important parameter that multinationals look at when making manufacturing investments.
Farm sector reforms are not simple like PLI or corporate tax cuts, but they are hugely significant. It is easy to criticize them by saying that they take a long time to show results or that they won’t move the needle on growth and prosperity very much. Some experts and critics have raised some practical issues like the issue of small farmers and their ability to get a good deal with corporate or other buyers. No doubt, these are real problems and will take time to get sorted out. Local administration, state governments and the centre will have to play a hands-on, proactive role in solving some of these issues and the farmers will probably need some help in striking good deals.
The fact that these problems exist does not negate the need for these sweeping reforms. Farm produce till recently was subject to restrictions that didn’t apply to other goods and the absence of regulatory frame work for contract farming was not something that could have been overlooked if the objective was to provide farmers with pricing and marketing freedom.
Freeing the farmer and allowing him or her to sell to anybody at market prices is a no-brainer kind of reform that should have been done in the first wave of liberalization in the 1990s. The fact that it took nearly 30 years only shows timid political resolve. Now, this reform will take time to play out but that does not mean it is not important. More farmer-private buyer interactions and trade will help both while paving the way for a formal supply chain that will move farm produce to the big markets. We are already seeing signs of start-ups using technology jumping into cash in on the opportunity. Like the big reforms of 1990s, this will take time to play out and will go a long way in improving rural prosperity.
The weakest leg of the government’s reform programme so far has been privatization. NDA-II had not shown any of the dynamism of NDA-I in selling state-owned units and had preferred a tried-and-tested strategy of doing regular OFS and ETFs of key shares of public sector companies. The result was a massive underperformance of PSU shares to the extent that it undermined the government’s attempts to find value and drove away investors.
Now, there appears to have been a change of heart and, also, a change in direction. And the man leading the charge is Tuhin Kanta Pandey, the secretary of DIPAM (Department of Investment and Public Asset Management). He has been making right the noises so far, telling investors that ETFs are not the solution and asking the PSUs to focus on improving return on equity, asset turnover ratio and engage with investors to understand the reasons for low valuation. The government also appears determined to complete the disinvestment/privatization programme that it had chalked out before the pandemic in February’s budget.
A point to note for the government also is that privatization need not always mean an outright sale to strategic investors. This is good if it happens, but the government should also explore other forms of privatization like selling bulk or majority of shares to a wide set of public investors in the stock market. Margaret Thatcher’s Britain followed this policy with resounding success in the 1980s but India has managed to tie itself up in knots over the route to be followed with the result that successful privatization examples have been few in the new millennium.
Mr Pandey’s interventions are bold and the government should follow this up by ceding majority control in a wide variety of public sector companies either to strategic or public investors. There is no reason to hold onto a bulk of companies, except a few core ones. The time for timid measures is over.
India has had several golden opportunities in the past 30 years since it liberalized. The first was in the 1990s itself after the first set of reforms in 1991/-93. But this was squandered and the next big moment came after the Congress government victory in the 2009 polls. This too, was wasted. A third golden opportunity to drive economic growth has now presented itself thanks to the slowdown in 2018/19 and the 2020 pandemic. There is a lot of determination in government circles these days about the need to do big things and drive sweeping reforms. Hopefully, unlike in the past, they will not be wasted. The political mandate is there. A strong government with an equally strong and popular prime minister has been in place for some time. The time to “take the tide at the flood” and drive on to fortune is now!