For the benefit of my readers, I will jot down the key highlights of his article.
What ails India?
- Growth is slowing
- Govt has less room to spend more as fiscal space is constrained
- Household and domestic debt is rising
- Financial sector is in stress
- Industry is not spending
- Unemployment is rising
What brought us here?
- Govt inherited a lot of issues when it won power back in 2014
- Land acquisition challenges, scams, coal and gas issues, bureaucratic hurdles stalled many infrastructure projects
- Power producers face challenges as debt ridden power discos delayed payments
- Bad loans on bank's balance sheet rose, as a result
- Govt misguided intervention in agriculture for decades created its own problems
- Rather than focusing on value creation for farmers, all governments took easy paths of subsidies, incentives, loan waivers.
Govt attempts to tame the beast
- Initially focussed on taming the fiscal spending and inflation
- Brought landmark resolutions like Insolvency and bankruptcy Code (IBC) to clean up the bad debt mess
- GST reforms to unify the Indian market and improve tax compliance
- RERA to clean up real estate sector
Second Order Issues
- Although all steps in right directions, govt miscalculated the second order effects.
- Promoters stopped placing bets using bank loans as they worry they may lose their firm in bankruptcy
- Banks stopped lending as they become more risk averse and ever greening of loans was heavily discouraged
- Industry confidence nose dived as govt seemed aggressive on penalizing the egregious promoters
- Unemployment rose as investment faltered across the country and businesses suffered from lack of demand/confidence
The way forward
- Govt/ businesses need to find new avenues of risk capital by going more aggressive on reforms and attract foreign capital to invest
- Encourage domestic institutions: Insurance companies and pension funds to take more risk
- De-risk the projects by providing faster clearance for land acquisition and other processes.
- Improve stability in the current policy regimes; constantly tweaking the rules and tariff structure creates uncertainty
- Economic vision and priorities should not get sacrificed to social and political motivations of current establishment
- RBI needs to assess NBFCs and brings regulatory certainty in the system; need to separate out the goods apples from the basket
- Need to create funds for credible developers to finish their projects faster
- Centre and state have to come together to resolve issues in power sector and maintain the sanctity of the contracts.
- Labour act needs serious reform
- India should not jump to reduce personal taxes to boost consumption - to stay fiscally prudent
- Also, temptation needs to be avoided to raise deposit insurance to 5 lakhs, as some have suggested, before a serious audit of entire banking sector esp. cooperative banks is finished.
