More than fifty different exit polls in Australia were proved wrong in the surprise victory of the coalition led by the Conservatives. This is in a country whose population is barely 2% of India. Three years ago the outcome of the Brexit poll also shocked most of the forecasters. Not only did the pundits get it wrong, but even the punters, who put their money where their mouth is, got it completely wrong. Apparently five times more money was riding on a non-Brexit outcome. And after Brexit was the surprise victory of US President Donald Trump, who defied all experts in not only defeating competitors from his own party, but also strong and well-funded rival from the opposition party. There’s a lesson in all these outcomes, but it is not obvious. Is it that people have started being coy of truthfully answering exit pollsters? Is their a deep distrust of the so-called elites, who dominate and control the narratives on media, and even social media? Is this a sort of revenge of the silent majority, the unseen undercurrent? This is enough fodder for political scientists and sociologists for years to come.
As of writing this column, it appears most likely that the National Democratic Alliance will cruise to an easy victory in Lok Sabha, and Prime Minister Narendra Modi will return for a second term. It would be an unprecedented outcome, much like the one in 2014 which was also unprecedented. This would be the first time since India’s independence that a party was given a second strong mandate by the voters, despite an extraneous factor like a sympathy wave or one dominant theme. A second term would be a time for consolidation and reap the gains of investments, physical, social and financial for the ruling party. However it should be clear that the economy needs urgent attention and top priority.
The latest monthly economy report published by the department of economic affairs in the finance ministry highlights very worrisome three year trends. The GDP growth has been steadily declining from its peak of 8.2% three years ago. The last quarter was 6.7 and if it declines even more, this would be a four year trend. This is at a time when world growth is quite steady and improving.
Secondly, investment-GDP ratio has remained stagnant at 28% for nearly four years. It was at a peak of 38% in 2008. Clearly, we need to move it up at least a couple of percentage points, which would translate into investments of nearly 3 lakh crore. The challenge, of course, is that this has to come mostly from the private sector. That would mean urgently addressing debt issues in power, telecom and civil aviation. It also means ensuring doubling the contribution of mining in GDP. India is rich in mineral wealth, but all of it lies beneath the land or sea, and does not translate into jobs, investments and incomes. Manufacturing sector is seeing tepid growth due to lack of perceived demand, pressure from imports, debt stressed balance sheets, and most importantly, the still unwieldy regulations hurting ease of doing business. The state and local regulatory requirements are still a significant drag. The labour intensive sectors like textiles and garments, construction, agro-processing, footwear and tourism need a leg up. The footwear industry was disrupted by the laws on cattle slaughter and transportation. This needs to be modified.
The third trend evident from the ministry’s monthly report is on the current account deficit. It has risen steadily in the past three years and is closing in toward 3% of GDP. The net growth in exports over past five years was zero. This can be attributed to a variety of factors, not all of which can be fixed easily. But surely zero rating Goods and Services Tax (GST) on exports is essential. Or at least instant refunds. Otherwise the cost of delayed refunds completely wipes out the profits, and this especially hurts small and medium entrepreneurs. The still strong rupee is also an impediment. All of East Asia and China rode their export-led growth for decades on the back of an undervalued currency. Surely there’s a lesson in that? India must also aggressively explore the possibility of rupee linked trade with Iran. Paying for Iran crude in rupees does not give them access to hard currency dollars, so this should not displease the Americans, if that is what is preventing the rupee trade. India must also aggressively woo tourists, especially from China as this will also go some way to reducing the bilateral trade deficit.
The fourth trend in the monthly report is the decline in agricultural output, or gross value added (GVA) over three years. We have to aggressively promote farmer producer companies, with downstream linkage with farm production, with tax and other incentives.
Lastly, the fiscal situation is quite bleak, since the headline numbers hide the true picture. This is slow acting poison but is surely detrimental to medium and long term growth. The dust will soon settle on election outcome and celebrations, and the honeymoon period will begin. That’s the time to move decisively ahead on hard decisions on economic reforms and spend some early political capital.
Ajit Ranade is economist and senior fellow, Takshashila Institution