A new focus needed on cooperative federalism

The new NDA government will take charge in the last week of May 2019. The immediate task before the government is to prepare and present the Union budget. The budget exercise will be against the backdrop of a sub-par 4 per cent inflation rate, a growth rate of a little higher than 7 per cent and Current Account Deficit (CAD) of slightly higher than 2 per cent. The economic scenario, thus, looks comfortable on the surface and the economy to some extent appears resilient. These numbers, however do not unfold the underlying story. Consider that

(a) agricultural growth has collapsed (3.8 per cent in first advance estimates, declining to 2.7 per cent in second advance estimates for FY 2019 against 6.3 per cent in FY 17 and 5 per cent in FY 18);

(b) factory output contracted for the first time in 21 months as reflected in the IIP numbers released in April 2019, with capital goods declining by as much as 8.7 per cent year-on-year; and

(c) the concerns arising out of the so-called twin balance sheet problem (balance sheet of banks and the corporates) remain largely unresolved for a prolonged period of time.

Further, there are new downside risks of a delayed and below-normal monsoon, reversal of  benign crude oil prices and possibilities (indeed the certainty) of a fiscal slippage (deviation from the budgeted targets) because of hard budget constraints arising out of downward rigidity in revenue expenditure. The burning problem of jobs creation which was so much in focus during the election season is another that needs focused attention.     

We know that around 50 per cent of our population is engaged in the agriculture sector though its share in economic growth is much lower (14.3 per cent in FY 19) than that of industry (23.3 per cent) and the services sector (62.4 per cent). Faster growth may come from industry and services. But it is agri-growth and agri-productivity that drives economic growth at the grassroots and provides long-term economic stability. This is because the employment potential in agriculture is high so that the fruits of growth are spread out and leave their footprints across many other areas, leading to a more balanced growth that can benefit the largest numbers possible. Yet, this is a sector that has received little attention. It remains largely at the mercy of the weather, suffers from poor infrastructure, lack of skills development and lack of institutional support to drive innovation.

In part, this is because agriculture is a State subject. Pushing through reforms in agriculture, in particular kick-starting ideas from a reliable cold chain to modern day storages or warehouses and in general looking to give a boost to the rural economy will require a high level of Centre-State cooperation. The new government in the interest of cooperative fiscal federalism should have a forum or institutional arrangement to address this. The institutional mechanism can be under the auspices of the NITI Aayog with the Chief Ministers and members of the Union Cabinet as members under the Chairmanship of the Prime Minister to push agricultural productivity, agricultural marketing and agricultural exports. This is easier said than done in the light of a political divide in the wake of a bitter election and a sharp split along party lines that seems only to have widened.  There is a trust deficit looming large with many regional leaders who are not a part of the NDA but are managing the States. We’ll need a high amount of statesmanship to chart this road.

Enhancing employment in agriculture needs to be supplemented with job creation in manufacturing and in the services sector. This has two aspects. One is higher investment in physical and social infrastructure and the other is increasing efficiency through higher productivity. Given that the government has little funds, the public private participation (PPP) model has been institutionalised. The evidence, however, suggests that there has not been very encouraging progress in the PPP model, possibly because the State governments are not fully involved. Again, the government may consider an institutional arrangement involving the private sector, State governments and the Central government for policy-making, funding arrangement and implementation of projects.

Investment in the economy critically hinges on the savings of the economy and the interest rate.  It is important to recognise that financial savings in different instruments such as bank deposits, mutual funds, small savings should go up and the flow of funds from financial savings to physical savings such as gold and real estate should be discouraged.  It could happen in two ways viz; (a) higher interest rates on bank deposits and (b) tax concessions on financial instruments. The government may revisit and relook at these options.

The outgoing Finance Minister of NDA-I has said the country is poised to become a USD 5-trillion economy in the next five years and a USD 10-trillion economy in the next eight years thereafter. But for some time, the growth numbers have stagnated. The new government has to address this with adequate attention to labour, capital and land productivity.  A new focus will be required on technology and technological readiness, investment in physical capital such as machinery and equipment, skill development of the work force, and quality development of natural resources, openness to cross-border trade and investment.

In sum, the new government will have to set the stage for faster growth and this will require deft management of the long term with the short term, along with carrying of different voices and ideas from across the political spectrum – something that was particularly weak in the preceding five years but must now pick up if the next five years are not to be lost.