The budget
documents have gone into print and all eyes are on Nirmala Sitaraman as she
presents the Annual Budget for 2020-21 in the Lok Sabha on Feb 1. To state her
task is arduous is perhaps an understatement. By most accounts, the budget of
2019-20 was let down in operational terms given the timing of the budget. The
government fresh from an unprecedented election victory would have pressed for
radical reforms but chose to state the vision without any corresponding
reformist measures. Despite economic announcements, more of corrective response
to economic happenings, doubts prevailed over the efficacy of the economic
handling. To add to the woes, there was a sharp downturn with the GDP/GVA experiencing
an abating growth for six consecutive quarters. Perceptibly, India’s economic
woes were presumed to be its own creation despite global headwinds. As a matter
of fact, the significant headwinds across the globe do not seem to be reaction
to one single large crisis but to host of micro-factors arising in different
parts. Despite the tendency to view in isolation, the answers must be found
through an examination of institutional disruptions in the economic super
structure.
Dr. Arvind
Virmani, senior economist and former Chief Economic Advisor posits a ‘J’ curve
of institutional change that perhaps lie at the roots of the downturn. ‘J’
curve has its counterparts in balance of payments and exchange rate models as
also in political stability models. The same is being adopted in decoding the
economic trajectory post reforms. The series of structural changes in economic
sphere is expected to have time lag before the establishment of new
equilibrium. The new equilibrium will set in process virtuous cycle of growth,
yet the transition will witness the pain thus the growth trajectory resembling
the alphabet ‘J’.
Humans being
social animals naturally generate interactions materialising in political,
social and economic domains. Unbounded interactions with prospective negative externalities
of increasing returns compel formal or informal structuring. Informal
structures predicate local environment yet the increasing enforcement costs at
scale demand construction of formal structures. Institutions are therefore those structures
that perform constraining role in human political, social and economic
interactions. With passage of time, institutions and interactions, formal or
informal converge towards an equilibrium that perhaps lasts for years. Disruptions
in institutional structures and boundaries ricochet with some significant penalties
at least in the short run.
For decades,
Indian economy is an amalgamation of both formal and informal sectors, white
and black with large shades of grey in between. Contrary to perception,
informal sector is bound by formal rules, yet the presence of transaction costs
enables it to rein away from the governmental control. The informal away from taxes drives the black
economy model and a part outcome of government-economic trade-off. There was
certain willingness one the part of the state to overlook black economy model,
a trade-off for political support and financing (which remains opaque). The complexity
of Indian economy and underneath structures create complications in monitoring
and enforcement thus higher costs relative to benefits. UPA-II was perhaps a tipping point with
covert and overt regulatory capture witnessing a backlash. The counter reaction
manifested in seeking judicial remedies and political agitation disguised as
non-political citizen driven protest.
Post 2014, both
judicial, executive and legislative interventions sought to end black economy
and seek merging the same with the white economy. The demonetization of Nov
2016, Black Money Act, movement towards digital transactions manifested a nudge
to integrate in the formal structure. Contrary to expectations, integration is
not instantaneous but a continuum. However, the interim does impose economically
induced creative destruction with economic consequences. Besides, any movement towards formal
structures necessitate navigating the corridor of human ingenuity. The shifting
terrain of the Indian economic structure is perchance impeding the growth
trajectory.
However, rather
than a single disruption, it is a series of disruptions that seem to generate
aggregative effect in being a speed breaker for the growth trajectory. The
introduction of Goods and Service Tax (GST) disrupted the tax models that preponderated
the Indian economy at least since Independence. Notwithstanding the movement
towards a common and single indirect tax regime, the complexities were perhaps
underestimated to some extent. It is no doubt praiseworthy to roll out a tax
system without significant increase in inflation contrary to experiences in
countries like Australia etc. The regime has to evolve with a learning curve of
price elasticity of demand with respect to changing taxes for thousands of
goods. It is virtually impossible the same without trial and error method and
hence multiple rate approach was followed. The low hanging fruit was fixing the
rate closest to the existing rate seemed natural adoption. The subsequent
changes are indicating a movement towards a simpler GST but the time lag for
the same is manifesting in the lower growth rates. Yet, given the levels of low core inflation
both CPI and WPI doesn’t point out towards complexity and price rise owing to
GST as cause of low growth.
Despite
agricultural growth emerging in sectors like animal husbandry and non-crop
based agriculture rather than conventional crop based, the policies are
designed towards the latter. The detailed analysis of agriculture challenges
and food inflations can be found in the piece ‘
Solving
the Food Inflation Puzzle’. Suffice to say, the disruptions seem to add to
decline in the growth rate.
Similarly
digital disruptions are calling into question the mechanism of GDP computations
in the digital age, a discussion of which is found in ‘
Why
it is Important to Evolve New Models in Recording GDP’.
Digitalization generates output saving, increases
consumer surplus but low prices skew the contribution to GDP given the current
methodology of the same.
The rise of ‘phone-a-call
banking’ during UPA-I and II, a colloquialism for lending loans to favoured
constituents on call from their benefactors in Delhi was lead indicator for the
prospective consequences. Post 2014, the stricter norms for classifying NPAs,
banks’ insistence of recovery of old loans, reluctance to lend new loans for
varying reasons caused a twin balance sheet crisis for the corporates besides
significantly eroding business confidence. The banks saddles with NPAs enforced
stricter norms of lending, firms with high debt on their balance sheet could
not roll over those loans and worse deprived of fresh loans, ensured investment
take some hit.
The introduction
of Insolvency and Bankruptcy Code was designed to create smooth exit. Yet for
many Indian firms and business families, this created a situation unheard of.
They were forced to let go of their family silver in the inability to repay
loans. While the exit policy, the India’s equivalent of Chapter XI, was sound
in intentions and practices, for many this meant the breakdown of the customary
order preferring the status quo. There is a resigned acceptance of the same and
there are bound to be lag effects before the reality sinks in on the new
business frames in place.
Beyond doubt,
the omerta code in business interactions has been significantly disrupted
generated shockwaves before the establishment of the new equilibrium. Dr. Virmani’s ‘J’ curve thesis is perhaps
theoretical explanation of this disruption. The remedies must be in alignment
in addressing these root issues. To add the unintended consequences of rights
based legislative interventions in social interactions introduced during UPA I
and II are beginning to be felt. The disruption in time-honoured silhouette of
adherence to omerta code of society, economy and politics is creating the
economic repercussions. There is bound to be time lag before entropy gives way
to the steady state.
Comments
Post a Comment