Reforms and Resilience

BRACING FOR A lengthy spell of high inflation, the effects of the Ukraine war and the continuing impact of the Covid pandemic, the Union government is preparing for a choppy ride but is not likely to moderate its ambitious plans to significantly scale up spending to sustain the growth momentum. The government’s view is that decisions taken during the pandemic to promote Atmanirbhar Bharat (self-reliant India) through initiatives like the production-linked incentive (PLI) scheme for sectors like electronics and pharmaceuticals are paying off as the economy recovers from the disruptions caused by Covid. The efforts are resulting in previously unanticipated gains, such as a record $400 billion in exports in 2021-22, along with indications that the encouraging trends in external demand herald a closer and beneficial integration with global markets.

The Reserve Bank of India’s (RBI) decision to go for a 40 basis points (bps) rate hike expectedly spooked markets but was seen as inevitable by government managers who expect that more such hikes are on the anvil. The high level of liquidity had to be curtailed by the withdrawal of measures taken in the last two years as well as rate hikes given that inflation has risen to over 6 per cent and is expected to remain at such levels for some time. The peak of the summer season, usually marked by higher vegetable prices, and the impact of higher commodity prices, could mean that inflation remains sticky till the monsoon arrives and cools prices. The higher power demand and stress on wheat supplies (at least partly caused by traders anticipating gains through exports) are all factors that fuel price rise. The Ukraine war has meant higher input costs in many sectors of the economy. The cost of cement and iron rebars has shot up even as real estate is seeing a revival with construction activity taking off in many metros, such as the National Capital Region (NCR). But while inflation is a concern, the news from various economic sectors is positive, raising hopes that growth will remain durable, assisted by the spending plans of the Centre and many states. “Price rise hurts people, but the growth in demand that we are seeing is also sustaining employment and the MSMEs and should result in higher—and steady—wages for workers too,” said an official.
The encouraging rise in Goods and Services Tax (GST) revenues—even taking into account the view of some commentators that this is aided by higher input costs—is real-time evidence that the economy is recovering from the pandemic. The balance sheets of companies are looking cleaner and more balanced in the wake of Covid-driven efficiency measures that reduced flab and improved bottomlines.

The assessment within the government is that inflation and the Ukraine war are factors impacting just about every country. Looking at inflation trends, many countries are witnessing a rise several times their average inflation in the past few years. Inflation in the US touched a 41-year record of 8.4 per cent in March, it hit a 40-year peak in the UK at 9 per cent in April, and in Japan wholesale prices recorded their sharpest jump ever at 10 per cent in April. If the Indian situation had been unique, it would have amounted to a double whammy given the fallout of the Ukraine war on supply chains. Although the rise in India’s consumer inflation is worrisome for policy planners and economic managers, it is more moderate than has been the case in many other nations. While India has had to curb wheat exports, it is far from being hit by a shortfall in terms of domestic requirements. RBI’s actions are expected to slow down demand but not extinguish it, and this is in sync with the Centre’s expectations that the less palatable effects of excess liquidity will begin to wane. It had always been a tough call as to when to hit the brakes given the fragility in growth. The central bank did wait as long as it could, even attracting criticism that it was delaying an already overdue rate hike, and the situation warranted it. A senior government functionary pointed out that it was very well to slam RBI and criticise the government for inflation but no brownie points would have been awarded if growth had stalled. Rather, the criticism would have become shriller and public distress more acute if jobs were lost. As has been the evidence in recent decades, reviving a declining growth cycle is laborious, uncertain and time-consuming.

The government is confident that the economic trajectory it has plotted will not be knocked off course. The formulation that has worked is a sustained focus on ensuring a range of benefits for the poor while also framing policies that attract investments and make the economy more efficient

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The fresh challenges to the economy have led to more politicking as the government and its opponents spar over finances. Opposition state governments have raised issues like GST dues, suggesting that a funds crunch is preventing public expenditure, including measures to help the poor. The Centre has countered the “dues” claim, saying revenues have been shared with states and the latest tranche is to be transferred only by end-June. “The states raising this demand know that the devolution is due in June, yet they say that April dues have not been given,” said a source. The government informed Parliament in March that `96,576 crore had been released to the states and Union territories to meet revenue shortfall on account of GST implementation. The bickering is not likely to end soon in a play of perceptions rather than facts. Similarly, the rise in prices of cotton and palm oil has seen states rush to the Centre seeking reductions in duty. A delegation of Dravida Munnetra Kazhagam (DMK) members of Parliament (MPs) called on Union Finance Minister Nirmala Sitharaman on May 18 seeking relief for the textile sector. The problem with the measures being sought is that they fail to alleviate the distress of the mills. The cuts in duty are promptly matched by increase in the prices of imports, leaving only a section of exporters beaming. In the case of palm oil, the price of Indonesian imports negated the duty reduction (Jakarta has recently banned exports to prevent domestic shortages). The result is a fall in Central revenues while the relief on the ground remains out of reach for those who need it.

There is confidence in the government that the economic trajectory it has plotted will not be knocked off course. The formulation that has worked, receiving popular approval in terms of electoral verdicts, has been a sustained focus on ensuring a range of benefits for those on the lower rungs of the socio-economic ladder while also framing policies that attract investments and make the economy more efficient. While employment figures remain contested, there has been a steady addition of subscribers to the Employees’ Provident Fund Organisation. The performance of MSMEs is heartening in terms of growth in numbers and loan disbursals with the government’s Covid packages intended to provide working capital rather than write-offs. The sector remains vulnerable but can benefit from the rise in demand. The incentives to manufacturing, opening up to foreign collaborations, the energy of startups and the growth of unicorns are factors that the government is banking on to ensure the current downsides do not overwhelm growth impulses. There is a clear goal to reduce dependence on China as a supply chain through promotion of Atmanirbhar Bharat which spans a large canvas, including sectors where India’s reliance on cheap imports has been high. The drive encompasses other areas as well, including defence where India is dependent on Russia, the US and other countries like France for its needs. A recognition that defence imports take time and are expensive has led to a forceful push for domestic manufacture with the defence ministry bringing out negative lists. These initiatives, often funded by government or in partnership with private players, will continue and are not likely to be affected by ups and downs in the economy.

The government, meanwhile, has not taken its eye off the Covid situation. The health ministry is monitoring the progress of plans to provide a medical college and hospital in most districts. The task is not easy, not the least as teachers and staff are needed to run the facilities; but the investments are seen to be productive in terms of the physical infrastructure created and the services made available. The recent inauguration of cancer-care centres in Assam is a case in point with specialised medical services reaching areas denied such facilities. In 2021, the Centre released nearly `8,500 crore to states to remedy gaps in primary healthcare. As a matter of fact, Central assistance has helped run state healthcare systems. The emergency procurement and manufacture of ventilators after Covid struck account for most of the machines in use in states. With the vaccination programme doing well, the government is firmly focused on promoting shots made in India. There was a brief period when the second wave hit India in 2021 that the government sought supplies of Pfizer and Moderna vaccines. Negotiations, however, made little headway as the companies sought indemnity clauses that went beyond the usual legal protection such contracts envisage. India’s need was acute in June, July and August of 2021 but thereafter supplies of domestically manufactured vaccines improved and representatives of MNC pharma companies found that the health ministry was no longer interested in their wares. Some of the World Health Organization’s (WHO) activism on death counts in India is traced by health ministry officials to the perceived snub to MNC vaccine-makers.

The emphasis on pharma is only set to increase as the sector was an initial beneficiary of the PLI scheme and the government is determined that the raw material shortage that India faced in the two Covid years will not be repeated in future. It is not possible to cut off all dependencies but a situation wherein capacity had to be built almost from scratch was a rude shock. A similar case is made out with regard to areas like electronic chip manufacture where India lags significantly. The PLI support to production of white goods like air conditioners and LED lights is also paying off with these companies becoming more attractive in the market and being able to raise finances more easily. There is a view that the PLI scheme might be in danger of being over-utilised and that such initiatives need to be balanced with efforts to promote economic zones and boost warehousing.

There is a pragmatic view of the policy challenges in a year that began on a hopeful note as the Omicron wave proved far less of a hazard than its deadly predecessor Delta but soon saw the Russian invasion of Ukraine upturn calculations. After several rocky weeks, the evidence is less disheartening as engagements with other nations indicate that interest in India has not diminished. New Delhi remains a port of call for many diplomats and businesses and foreign visits by Indian ministers and delegations have been well received. The trade pact being worked out with Australia and the one concluded with the UAE, besides deepening ties with nations like the UK and Japan, are welcome developments at a time when growth faces fresh hurdles and uncertainties. Besides making the Indian economy more resilient, the linkages come with an important political component as most of the nations that India is seeking partnerships with share concerns about China’s attempt to turn the Indo-Pacific into its private pond and use economic blandishments to co-opt partners. The drive to create global supply chains immune to the coercive policies of a regional hegemon is part of a jigsaw that India hopes will fall in place.

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Rajeev Deshpande

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