SCCE CASCADE June 2019

Contents :
Introduction
Indian Economy
Major Challenges for the
Government
Population Growth
Consumption Slowdown
Investment
Exports & Trade
Agriculture Distress
Challenging Foreign Policy
Landscape
10 Ways the Modi Government
can Kick-Start the Economy

SCCE CASCADE June 2019

 Introduction:
After securing a powerful electoral mandate for a
second five-year term, India’s Prime Minister
Narendra Modi has a unique opportunity to embrace
economic reforms without populist hues. This is also
an imperative because economic factors will decide
India’s power in its subcontinent and elsewhere.
The BJP-led National Democratic Alliance (NDA)
stormed back to power in an unexpected show of
strength in elections to the Lok Sabha, the lower
house of the Indian parliament, held in April and
May. As many have noted, this represents the world’s
greatest exercise in democracy; some 600 million of
an eligible 900 million voters participated, including
an estimated 45 million young people who were
voting for the first time. The NDA won 353 seats of
the 542 seats that went to polls in the 543-seat Lok
Sabha; authorities cancelled the election in one
constituency after tax officials found a large stash of
unaccounted cash in a politician’s house. The BJP
won 303 seats, 21 more than it did in 2014; the NDA
added 17 seats between the two elections.

SCCE CASCADE June 2019

 Indian Economy:
India may be the fastest growing major economy in the world, but it confronts serious
headwinds with growth slowing, demand waning, private investment still missing and the
global economy facing uncertainty.

SCCE CASCADE June 2019

 Major Challenges for the Government:
If Prime Minister Modi’s 2014 mandate was India’s biggest in three decades, his 2019
reelection was an even bigger feat.

Modi cruised to victory amid agrarian distress, youth unemployment, high income
inequality, anemic growth, a broken financial system and the promise of a basic income for
50 million of the country’s poorest families by the Congress, making the win even more
momentous.

The government will hit the ground running as it looks to get economic growth back on
track by simplifying taxes, easing compliance and spurring demand. A plan to kick-start
private investment and stimulate demand has already been drawn up as the incoming
administration gets ready to present a full budget in July. The finance ministry and other
departments have already prepared measures aimed at stimulating the economy that need
to be taken by the government. The first challenge would be to revive demand, officials
said. The budget is likely to be presented in early July and could, as was promised in the
interim budget, cut personal taxes to put more money in the hands of the middle class, thus
persuading people to spend more and drive up demand.

SCCE CASCADE June 2019

 Population Growth:
India ranks second after China in total population. Its
population has grown 20% per decade, leading to
problems that include food deficits, sanitation
deterioration, and pollution. Although economic growth
numbers look promising, the living standards of most
citizens are not changing. Malnutrition is a severe
problem in India that is causing childhood stunting,
anemia in women of reproductive age, and overweight
adult women, according to The Hindu Business Line.
Only 6% of India's poor have access to tap water versus
33% of the non-poor. Sanitation is a massive ongoing
problem that the government has been unable to
address. For example, 21% of India's poor has access to
toilets versus 62% of the non-poor. Most of those
without access are people who live in urban slums and
rural areas.
A large populace in the rural areas still defecates in the open. China, the United States, and India are the
three most egregious environmental polluters in the world in that order. India uses coal for 75% of its
power requirements, and it has been slow to transition to cleaner energy sources. New Delhi and other
cities in India are among the most polluted in the world, and car emissions in these urban areas are
creating breathing and other health problems.

SCCE CASCADE June 2019

Consumption Slowdown:
Everything from car sales, two-wheeler sales, and tractor sales have been
falling. In fact, even moped sales have fallen over the last two months by
9.8% in March and 5.9% in April. Non-oil, non-gold, non-silver imports—
another good indicator of consumer demand—have fallen over the last four
months.

People are clearly not spending money at the same pace as they were earlier.
It has been suggested by more than a few economists and analysts that the
government needs to increase its expenditure in this financial year and the
Reserve Bank of India (RBI) needs to cut the repo rate (the rate at which
central bank lends money to other banks) further. With private consumption
slowing down, the government spending more will lead to increased income
in the hands of people, and then they will spend more and economic growth
will revive. That’s the theory.

In this scenario, if the government decides to spend more, it will mean the government will have to borrow
more. This will leave lesser for everyone else to borrow and push up interest rates. A credit-deposit ratio of
76.9% also explains why interest rates have barely gone down despite the RBI cutting the repo rate twice since
the beginning of this year.

The learning here is that an expansionary fiscal policy (with the government spending more) and a loose
monetary policy (with the RBI cutting the repo rate) cannot always be carried out at the same time. Sometimes,
no government interference can be the best possible solution.
SCCE CASCADE June 2019
 Investment :

Fixed investments have been almost stagnant at about 30%

of GDP in the past four years, while foreign direct
investment has declined recently -- partly because of the
uncertainty ahead of the election, but also due to
politically-inspired protectionism and bureaucratic
bottlenecks, which have kept investors away. India has
missed out on the flow of FDI into regions like Southeast
Asia as companies shift production to avoid rising tariffs in
the U.S. and China. A stable government with continuity in
policy and progress on reforms could boost the sentiment.
“The challenge that we are facing in sluggish private
investments needs to be addressed with special attention,”
analysts at Elara Capital, led by Ravi Muthukrishnan, wrote
in a note. “Sticking to fiscal discipline and avoiding
crowding out of financial markets, would be key to increase
in private investment activity.”

SCCE CASCADE June 2019

 Exports & Trade:
One of the clear learnings from the history of economic
development is that almost every country that has gone from being
a developing country to being a developed country has done so
through the export route. First, the country starts with low-value
labour- intensive exports and then gradually over the years moves
on to high-value ones. The low-value exports create jobs at a
massive pace. In 2018-19, the exports of goods stood at $329.6
billion. This was the first time that exports in absolute terms were
higher than the exports of $310.1 billion in 2014-2015.

Nevertheless, that is not the right way of looking at the situation. Over the years, the Indian economy has
also grown in size and that needs to be taken into consideration as well. Exports to GDP ratio in 2018-2019
stood at 12.09% of the GDP. It was just about higher than the exports to GDP ratio of 11.78% in 2004-2005.
This is a serious anomaly which needs to be set right. Also, India seems to be moving away from low-value
exports. As the RBI Monetary Policy Report of April 2019 points out: “An important feature of India’s
export basket in recent years has been a shift away from primary and traditional low value-added exports to
higher value-added manufacturing and technology-driven items.”

India last posted a monthly trade surplus in March 2002. Rapid economic expansion since then has meant the
nation’s imports have far outgrown exports, with oil being the nation’s biggest purchase. That’s pushed the
current-account deficit to more than 2% of GDP last year, making it a key vulnerability for the economy.
While India is trying to narrow the shortfall by reducing its reliance on imports and boosting exports, that
will prove difficult in a global environment of slowing growth and rising trade protectionism.

SCCE CASCADE June 2019

 Agriculture Distress : :
The short-term reason for distress in agriculture
has been falling food prices. Nevertheless, there is
a long-term reason as well. In 2004-2005,
agriculture, forestry and fishing, as a percentage of
GDP, stood at around 21%. It has since dropped to
around 13.1% . This means that people need to be
moved away from agriculture and that is
something which hasn’t happened.

Typically, as countries move from being developing countries to becoming developed countries,
the farming labour first moves end masse towards low-end construction and real estate jobs,
given that the skill set required for these jobs is very low. In India, that hasn’t happened to the
extent necessary. The real estate prices in cities have been at astronomical levels, leading to less
buying of homes and, in the process, there has been a slowdown in new real estate launches.
There is not much that the government can do about this, unless it starts from scratch by trying
to clean up political finance in the country. But they can do a thing or two about creating
construction jobs. Many Central Public Sector Enterprises (CPSEs) can be done away with, the
capital blocked in them unlocked, and their land sold to finance the creation of new physical
infrastructure in the country and, in the process, create low-skill construction jobs.

SCCE CASCADE June 2019

 Challenging Foreign Policy Landscape:
India-U.S. tensions with trade are bubbling under the surface and Government will have to work out a way to
resolve these tensions with a Trump Administration which may get even more intransigent as it enters the
election phase. Where India-U.S. strategic partnership is likely to continue becoming stronger, the economic
dimension of the relationship needs serious work. The role of Iran and Russia in the Indo-U.S. bilateral matrix
will also need addressing.
China’s growing global footprint is constraining India’s options significantly. Globally, as India tries to make a
case about its own role and place in the international order, China continues to push back and remains
reluctant to acknowledge India’s global rise. Despite Government’s China outreach in Wuhan, bilateral
disputes remain far from resolved. And this is also having an impact on India’s engagement in its immediate
periphery in South Asia and the Indian Ocean region. India’s neighbors continue to look to China as a power
with more capabilities and increasingly serious intent whereas India’s inability to deliver and economically
integrate the region makes New Delhi regional outreach challenging.
The Pakistan problem is unlikely to go away anytime soon and Government’s will have to continue to find
different means of managing the challenge. Growing Sino-Pak axis adds another dimension to this problem.
One of the most immediate challenges in the neighborhood for India will be to find a place for itself in the
unfolding peace process in Afghanistan. Though there is hardly any clarity on the pace and direction of this
process, there is a push to see it through to some sort of conclusion. Government will have to remake the case
of India’s relevance in the unfolding dynamics in Afghanistan.
A range of other issues would demand Government’s immediate attention. Rising tensions in the Middle East
between Iran and the U.S. will be problematic for India. Comfortable assumptions of the past about balancing
the trifecta of Iran, Arab Gulf states and Israel will no longer suffice. India’s energy security requires a stable
Middle East and New Delhi will have to raise its profile in the region with all the attendant consequences.
SCCE CASCADE June 2019
 10 ways the Modi Government can Kick-
Start the Economy :
Here are ten things that can help the Modi Government to incite the economy:

1. Cash from public assets : The Government can look forward to monetize assets including rail
tracks, roads, ports and power units to generate funds for public investment. The auction of
new spectrum is expected to yield a bonanza for the government.

2. Disinvestment : The government needs to quickly plan a big selloff programme. The main
priority should be to exit all non-strategic PSUs and shut the loss-making ones. Employees of
such organisations should also be given generous voluntary retirement schemes.

3. Liquidity for NBFCs: The government can come to the rescue of the Non Banking Financial
Company (NBFC) by buying some of the assets owned by them using government bonds,
which can be used by other such entities to raise resources.

4. A Few Big Banks : The idea of a few big banks could finally materialise under Modi 2.0 with
the merger of public sector banks to create five big players. The government then needs to
capitalise them adequately to strengthen their balance sheets.

5. Fix IBC Process : The IBC (Insolvency and Bankruptcy Code) needs amends as in the time
taken for the resolution of stressed assets needs to come down.
SCCE CASCADE June 2019
 10 ways the Modi Government can Kick-
Start the Economy :
6. GST 2.0 : Simplify GST further by doing away with the two top rates of 18% and 28%. GST
tax slabs could be merged into two main rates from four at present. BJP's election manifesto
talked about simplification of the GST process and lowering time spent for tax compliance to 1
hour per month. It also promised reduced tax rates, higher tax collection

7. Mining Revival: Address logjam in mining to get coal and iron ore moving. Bottlenecks in
coal supply are hurting utilities, aluminum smelters and steel mills.

8. Cities as Growth Engines : Build new cities, redevelop older ones; address real estate issues.
The government's Smart City Mission should also be revamped to take the government’s urban
reforms agenda forward.

9. China Opportunity: Roll out mega industrial zones, labour reforms and land acquisition law
to encourage large-scale competitive manufacturing. The government will also need a strategy
to gain market access in China for its farm and pharmaceutical exports and attract foreign
companies looking to shift out their manufacturing bases from there in the wake of the trade
war between the US and China.

10. Empower the Kisan: Remove all curbs on selling farm produce, green light GM farming for
food and cash crops. A continuing emphasis on inclusive social welfare programmes, under the
umbrella of “Antodaya” (upliftment of the poor), will run through the plan.
SCCE CASCADE June 2019
 Sources of Information :
 https://knowledge.wharton.upenn.edu/article/india-election-2019/
 https://economictimes.indiatimes.com
 https://www.cnbctv18.com
 https://www.entrepreneur.com/article/294379
 https://www.livemint.com/
 https://www.brinknews.com
 https://thediplomat.com/
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team : cascade@scce.edu.in, sccecascade@scce.edu.in or cascade_scce@scce.edu.in

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SCCE - Cascade Team : Dr. Seema Singh, Director, SCCE and

Ms. Mayura Pathak, Supervisor, SCCE

SCCE CASCADE June 2019