It is that time of the year, a period of ‘Great Economic Expectations’. Budget 2016 is around the corner, and several sections including the middle class, business community, economists and global observers, have produced their own wish lists for Arun Jaitley, Finance Minister. Jaitley is under pressure to produce a grandiose policy blueprint to enable high growth, and ‘Development for All’. The eyes of 300-400 million are trained on the rabbits that Jaitley can pull out of his briefcase on February 29?
However, this is exactly the trap that the finance minister needs to avoid. He shouldn’t focus only on big-ticket reforms, impressive policies, and lavish declarations. Instead, he should largely deliberate on the mid-course corrections. In the past 20 months, the government has announced splendid schemes – Make in India, Digital India, Skill India, Start-Up India, Swachh Bharat Abhiyaan, Jan Dhan Yojana, MUDRA Bank, and many more. Unfortunately, all of them have several inherent flaws that need to be remedied. Let us take a look at some of the crucial issues that Jaitley has to tackle in Budget 2016.
WAKE UP INDIA
At a recent panel discussion, Raghuram Rajan, Governor, Reserve Bank of India (RBI), speculated whether the globally-accepted “export-led growth model” had “run its course”. He gave the example of Japan, an economy that has languished for the past 25 years after relatively-high growth between 1960 and 1990. Lawrence Summers, Professor Emeritus, Harvard University, in fact said that the era of export-led growth for the Asian economies was “mostly over”. China is a prime example of this trend.
Summers and Rajan also discussed the prediction that growth rates in Asian nations will be lower in the future, compared to what they had witnessed in the past. Hence, they concluded that Asian economies will henceforth have to depend on internal and intra-regional demand, rather than sell their products to the developed and advanced economies. These observations have huge implications for ‘Make in India’.
In the minds of Narendra Modi and Jaitley, as global investors throng to the country, they will make products that can be sold internally and globally. The duo are confident that India will become a global manufacturing hub, and replace China, like the Red Dragon did with the Asian Tigers (Hong Kong, South Korea, Singapore and Taiwan), which displaced the Land of the Rising Sun, i.e. Japan, from its economic peak. Hence, India will become the new engine that drives global growth.
In the past 20 months, the government has announced splendid schemes – Make in India, Digital India, Skill India, Start-Up India, Swachh Bharat Abhiyaan, Jan Dhan Yojana, MUDRA Bank, and many more. Unfortunately, all of them have several inherent flaws that need to be remedied
Such thinking goes against predictions by Summers and Rajan. If export-led growth strategy is likely to fail, then there is no point in pushing ‘Make in India’. Instead, it may be a better idea to simultaneously look at other sectors in agriculture and services that can provide better platforms for future growth. May be there is a case to draw lessons from the recent growth trends in states like Bihar and Gujarat.
DELIVER IN INDIA
The reasons behind the Gujarat miracle during Modi’s reign as chief minister were agriculture and services (largely self-employment opportunities). A 2009 study by Ashok Gulati, Tushaar Shah and Ganga Sreedhar found that the agriculture sector witnessed an almost double-digit average annual growth rate between 2000-01 and 2007-08. The figure was more than twice the annual rate, despite a drought in Gujarat in 2002. It was faster than what Punjab witnessed during the Green Revolution period.
A closer look at the economy of Bihar, which witnessed unprecedented high growth during Nitish Kumar’s tenure as chief minister, proves that it was the services sector that contributed to it. The sub-sectors that performed consistently well included communication, banking and insurance, and trade (including hotels and restaurants). Although the popular notion is that construction was the best performer, the figures prove otherwise. Initially, the sub-sector did grow by almost 20% annually, but the rate dropped to 6.6% later.
Therefore, it may be better to pursue ‘Make in India’ along with ‘Deliver in India’ and ‘Grow in India’ to achieve a well-rounded development over the next few years. As Rajan warned, “Because you have an export sector on steroids, a manufacturing sector on steroids, relatively the other sectors have been under-developed.” His solution for overall success was infrastructure facilities which can boost all the sectors. “I am hoping we have ten years of massive infrastructure spending,” he added.
Modi and Jaitley are, thus, correct in their aggressive focus on infrastructure. But they need to do much more, and find ways to re-kick-start PPPs (Public Private Partnerships). They should also look at specific sub-sectors across the three sectors, rather than overall manufacturing. Only then can they ensure that more citizens ‘Stay in India’.
When one talks of Digital India, there are two kinds of access that are involved. The first is access to a smart phone. According to an estimate, 30% of mobile owners have a so-called smart phone. Obviously, the number of owners of such a phone will be lesser in rural areas. For example, as per Census data, only 48% of rural households own a mobile of any kind, be it basic, feature or smart. The overall figure in a few states is lower; in Madhya Pradesh, the figure stood at 33.5% in rural areas.
Clearly, India has a long way to go before it has a sizeable number of ‘smart users’. In addition, one needs to distinguish between a true smart phone owner and one who has a mere feature phone. The latter user will not really benefit from Digital India because of the speed- and connectivity-related issues in an existing feature phone.
The second divide within the mobile owners is linked to gender. In both urban and rural areas, several community-based studies found that there is a prevalent gender divide within the digital divide. So while the women and girls can access a basic phone, though in a restricted fashion, they have minimal access to a smart phone. In several pockets of India, the bulk of the smart phones are owned and used by the male population. Similarly, girls and women are not allowed to visit a cyber café to access the Internet.
In addition, the non-owning women and girls use the phones of their brothers and husbands, primarily to talk and not to surf the Internet or download and use mobile apps. Therefore, Digital India will not be able to bridge this gender-digital divide. In the end, the divide may increase as the men and boys get more opportunities at lower or zero prices, even as the women and girls remain cut-off. This can be the unintended implication of a policy which, if implemented smartly, can definitely bridge the digital divide.
Modi kicked off Jan Dhan in a spectacular fashion; 15 million new bank accounts for financially-excluded people were opened on the first day. However, the scheme was criticized by experts. A commentator wrote in Mint that Jan Dhan can accelerate political populism, and politicians’ inherent desire to woo vote banks in the future. Others have said it was a ‘loan mela’ packaged in a different way as it allowed the new account holders to get an overdraft of Rs 5,000 each. No one knows if this money will be repaid.
While financial inclusion is a noble idea, and required in India, a better move was to accept the RBI recommendations. This is the reason why Rajan was unhappy with the scheme. Frontline magazine wrote that the RBI Governor obliquely warned the “government against exposing banks to risks similar to the subprime risks in the West.” He was referring to the overdrafts up to Rs 75,000 crore that banks may have to provide under Jan Dhan.
In the minds of Narendra Modi and Jaitley, as global investors throng to the country, they will make products that can be sold internally and globally. The duo are confident that India will become a global manufacturing hub, and replace China. Hence, India will become the new engine that drives global growth
A piece in Indian Express said that although the government claimed to have disbursed over Rs. 71,000 crore through MUDRA Yojana, only Rs. 2,000 crore was refinanced by it. “The rest of Rs. 69,312 crore comprise loans disbursed by microfinance institutions (MFIs) and banks which have now been renamed as MUDRA loans. The scheme aimed to refinance collateral-free loans of up to Rs. 10 lakh. In effect, MUDRA is a matter of renaming what existed earlier by another jargonized name. The rating agency, ICRA, felt that most of the loans that MFIs gave “would (automatically) qualify to be called MUDRA loans as well.”
Although the government claims that it had built millions of toilets, a Squat Survey by Research Institute for Compassionate Economics found that half of the homes that had government latrines didn’t use them. The people preferred to defecate in the open because they found it “pleasurable, comfortable or convenient.” In fact, there are reports that such latrines were converted into storage spaces by the households. Women prefer to defecate in the open in groups, where they can share sensitive information, be it about themselves or their family members. They don’t get such opportunities in a toilet.
The Squat Survey added that even those who were against open defecation didn’t want the simple latrines that the government built, and which they too could afford, but the more expensive and premium ones. “To achieve its goal of eliminating open defecation by 2019, the Government must redirect sanitation policy towards promoting latrine use. India needs nothing short of a Latrine Use Revolution, publicly directed by the country’s top leaders and known to every rural Indian,” the survey said. It felt that what India needs “is a focus on motivating latrine use rather than continued efforts to build more latrines.”
Clearly, Jaitley has a broad roadmap for India 2020. He, along with Modi and other cabinet colleagues has to give it a concrete direction by removing the flaws in most of the schemes. If he can Budget 2016 to take corrective actions, it will help the country, its citizens, and the Bharatiya Janata Party more than new grand policies. If Team Modi can even achieve better results in some of the existing schemes, the voters will support it in 2019. Else Modi’s dream of a second tenure will turn into a nightmare.
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