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Budget 2019 - between the devil and the deep blue sea with a monster waiting!

If you have ever visited Jabalpur, you surely would have taken a boat ride across 'Bandar Kodini' at the Bhedaghat waterfalls. The boat ride initially takes you along the Narmada river at a leisurely pace, as you gape in wonder at the majestic white cliffs - a hundred feet tall on both sides - changing colour. They do not actually change colours, the cliffs comprise of many shades of marble and as the rays of the sun bounce off their surface, give an illusion of changing colours. And then as your boat ride comes to a close, the tranquil waters of the river gain a sense of urgency after a point and turn turbulent as they crash down the Dhuandhar falls.

I don't know if the new Finance Minister Nirmala Sitharaman has ever visited Bhedaghat, but she might be able to relate this with the experience she is going to have with the Indian economy. The two giant cliffs she is rowing the boat between are Slowdown in Economy and Managing Inflation. With the NDA government having managed a thumping victory in the elections - the waters are very calm now on the surface but as we get nearer to another election, the waters will again turn turbulent like they did for the UPA-2 (though for an entirely different set of reasons) from 2012-13.

The simile with Bhedaghat doesn't end here - the cliffs that Sitaraman faces change their colours and hues. Economic Slowdown manifests in form of farm sector distress, and the moment you allow farm incomes to rise - you drift towards the other cliff - retail inflation! Then you might try to solve the dual issues by not allowing farm output costs to rise (thus keeping retail inflation in check) but dole out money to farmers via Income Guarantee schemes like MNREGA or PM-Kisan Samman.

But the moment you grant income guarantee to farmers, the cost of labour goes up [read more on this here]. With this, sectors like real estate - already grappling with a slowdown due to structural reasons, stringent regulation and impact of demonetisation - will suffer the problem of labour shortage.

The manufacturing sector will also start avoiding labour because they are costly and their availability very seasonal. Also, as labour availability drops or cost of labour rises, manufacturing becomes a capital intensive industry rather than labour intensive industry (like it is in China) - and so that leads to a drop in generation of jobs which is again another sign (colour) of the Economic Slowdown.

If you've noticed the highlighted text - we have come a full circle from Economic Slowdown to Economic slowdown, just like you can keep shuttling between two tall marble cliffs at Bhedaghat.

Successive finance ministers have kept shifting their policy positions from trying to spruce up the 'Indian economy' to gain escape velocity 8%+ growth to trying to protect 'Bharatiya Arthvyavastha' from getting marginalised in the rising tide. If you had infinite time, you could keep shuttling between these two and enjoy your boat ride merrily - like successive FMs starting with Yashwant Sinha, Jaswant Singh, P Chidrambaram, Pranab Mukherjee, and finally Arun Jaitley have done.

But as all of their cases indicate - no one has infinite time; with every election comes the point where the river leads to a waterfall. Vajpayee lost because his FMs could not manage consumer distress, Chidambaram survived because he managed to keep growth high but in the very next term this came biting the UPA back and leading to high inflation coupled with cases of corruption in high places. With Jaitley, the reverse happened where farm distress came biting him back, but two things saved him - one that he got an opportunity to bring in a short term solution of PM-Kisan in the interim budget and second is national security becoming the focal point of the 2019 elections. The government's ability to execute PM-Kisan with swiftness definitely had a role to play.

However, Nirmala Sitaraman now has to bear the brunt of increased load on government expenditure of welfare schemes, at the same time managing to maintain low inflation, high growth and yet keeping fiscal deficit low. Unfortunately, solutions for her lie outside the purview of the Finance Ministry into structural reforms by other ministries - probably the reason why her role in the Cabinet committees will be more important than her role within her own ministry. Some of the changes that need to be brought about are:
  1. Land reforms - For all the talk about India's farm distress, the most visible statistic is India's agricultural productivity which is less than 6% of the global average and 25% of the median. Urgent reform in land laws and agricultural ownership methods - this is urgently needed so that the farm sector gets corporatised and can improve its productivity.
  2. Labour reforms - the reason for manufacturing boom in China is not a program like Make In India or Make America Great Again, but flexible labour laws. As much as I believe that the global economy has already passed the point where manufacturing can become a force to beckon [ref], if any country wants to employ its people in labour-intensive industries - whether its manufacturing or BPO/KPO services - freedom to hire and fire labour is a key requirement to boost employment.

    One of the reasons why a majority of employment is generated in India by Small Enterprises rather than large ones is that major labour laws do not apply to Small Enterprises. So large corporations often prefer outsourcing jobs to smaller companies than insourcing those jobs by increasing workforce. The result, of course, is not just non-applicability of labour laws on labour employed but also the exclusion of this labour from government statistics and social security programs offered by large corporations. If only certain aspects of labour laws were modernized, these labour could enjoy better work conditions doing the same work they are doing right now, but under the aegis of a larger corporatised entity in the formal sector. 
  3. Infrastructure development - mostly the portfolio of Nitin Gadkari; improving infrastructure will contribute to a large extent in removing the growth bottlenecks for the industry. Again, the China equivalent shows up - whether it is highways, highspeed rail or better-planned IDCs (Industrial Development Corridors) - almost all measures are outside the purview of the Finance Minister's portfolio. 

Finally, what can the FM do within her own department which can bring about required changes - the list indeed is short:

  1. Resolve the NPA mess and bring about measures to improve corporate governance in public sector banks  
  2. Provide tax subsidies or reductions or both to export-oriented industries which are badly hit by the US government's announcement to revoke GSP status from India.
  3. Sops for sunrise sectors of consumption such as food processing, energy (especially cleantech) and technology. 
  4. One of the biggest challenges for the RBI has been that its decisions to cut interest rates have little impact on the markets because Banks choose not to transmit these rates to the market. While I am not a big fan of the Govt running the Banking Business, nevertheless, given that the government does today own majority of Banks and regularly intervenes causing ill-effects on the economy; the govt can push public sector banks to get better interest rate cut transmission. 

Its a tough job and historically, no one has emerged unscathed from their role as the Finance Minister - including the much haloed Manmohan Singh. It remains to be seen how India's first woman Finance Minister fares with this role!


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