FIXING SOFTWARE BUGS IN INDIA'S ECONOMY

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FIXING SOFTWARE BUGS IN INDIA'S ECONOMY

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• Resetting the economy: The Budget is a crucial time now, for creating a boom time in coming years. It has to start with a proper diagnosis of the problem. The key lies in improving the "software" of economic stewardship. It is an ongoing effort.
• Many steps taken: The government has taken many big decisions, including the GST launch, the IBC, and RBI MPC's FIT regime. These were to respectively make India a common market, to give exit in capitalism, and to target inflation prudently.

1. Minor steps: FDI was liberalised, labour laws reformed, and corporate tax rates reduced sharply. A new philosophy of welfarism - New Welfarism - brought physical goods directly to citizens (toilets, cooking gas). Connectivity via physical and digital improved.
2. Problematic steps: Demonetisation was criticised for its negative impact, as was UDAY power sector scheme. GST remained complex and under-optimised, and IBC is now slowed down a lot.

• Net result: Many decisions by govt. have to play out in an environment with many internal and external realities, and hence an assessment has to be carefully done. But is the economy better off, or not, now?
• The good output: Inflation was controlled strictly, at an average of 5%, that brought macro-economic stability. The current account deficit narrowed to just 1% of GDP, and forex reserves shot up to $600 billion. Fiscal deficit didn't balloon. The NFHS-5 showed that many more households got access to LPG, toilets, banking and electricity. But child nutrition did badly, because it depends on macro-economic income situation, which is based on overall economic health of India.
• Story 2000 onwards: The infrastructure investment boom of early 2000s ran into trouble soon, after the Global Financial Crisis (GFC). But bankrupt firms could not exit, and dragged overall profitability of corporate sector down into the negative. NPAs rose and rose. Twin balance sheet problem (TBS) became strong, where firms could not expand and banks could not lend. So the fundamental lubricant for any economy - real credit growth - went down sharply. And in 2021, the RBI report indicates a worsening of NPA ratio to 13.5% by September 2021.
• Solutions and remedies: It is true that regular tweaking in rules and systems is needed to make them succeed. That is happening, but not showing results.

1. The hardware was the reforms being done. The software is (i) accurate data, (ii) fair decisions, (iii) winning everyone's support by consensus,  (iv) policy consistency and (v) implementing the rule of law.
2. It is the software alone that earns the trust of investors, citizens and states (of India). Trust is how schemes get properly implemented.

• Deeper analysis:

1. Data integrity: Reliable data alone can earn consistent trust, and this got eroded in recent years. Reports have been junked, hidden, delayed. Fiscal deficit figure was masked by off budget borrowings.
2. Fair decisions: By giving some firms preference over others, the balance is being lost. Private enterprise will earn more stigma in public's eyes, and sectors like retail, telecom and airports will be seen as pure monopolies. All major decisions have escaped Parliamentary scrutiny.
3. Winning support: The smooth manner in which even a half-baked GST was passed, was missing in later decisions (pandemic lockdowns, farm laws etc.) Lack of trust hampers implementation badly.
4. Policy consistency: If doubling farm incomes is the goal, then random export bans must not be used. Foreign investors cannot be attracted, if retrospective taxation cannot be done away with in spirit as well.
5. Rule of law: Tax enforcement cannot be arbitrary, contractors' dues must be paid in time, and law applied equally to all.

• Summary: Govt. has to urgently restore dynamism to the economy long weakened by problems, and ravaged by pandemic. While hard measures will be taken, the soft measures must be adhered to with greater conviction. Without the software, the hardware won't work.

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