The Hindu Editorial Analysis | 16th Sep’19 | PDF Download

• During the global financial crisis, it was said that the experts were behind the curve. The International Monetary Fund (IMF) and financial sector experts continued to predict till October 2008 that the global economy would grow rather than shrink. They were way off the mark since the global economy was rapidly slipping into a great recession.
• Explaining the markdown
• Is India facing a similar situation at present? The economic growth rate (quarterly) has been sliding for the last five quarters from 8% to 7% to 6.6% to 5.8% and now to 5%. Yet, experts have been talking of a 7% annual rate of growth; every quarter when the rate of growth has been announced, they have argued that things have bottomed out and that the rate would rise henceforth.
• The Economic Survey in July talked of a growth rate of 7% for the current year. The Reserve Bank of India (RBI), in its August policy statement, talked of a slowdown to 6.9%, from the 7% predicted in June and 7.2% predicted before that. The Asian Development Bank cut its growth forecast from 7.2% to 7% in April 2019. Similar is the case with the IMF which cut its forecast for the year from 7.3% to 7%. So, they all talked of a 7% rate of growth when a year earlier it had fallen below that.
• How could these agencies be so far off with their estimates? The reason is that they are not independent data gathering agencies and depend on official data. So, if official data is erroneous, their projections would also turn out to be incorrect. Clearly, the government is interested in projecting a good image and so discounts bad news and ramps up data.
• The question to ask is, if the economy is growing at 5 or 6%, which is historically a good rate of growth, why is investment rate not rising and consumption in the economy stagnant? Where is growth dissipating? The alternative explanation is that the rate of growth is much less than 5%; that is why investment rate and consumption are stagnating or declining
• The investment rate has hovered at around 30% for the last several years because the capacity utilization in the economy has been around 75%. Unless this rises, fresh investment will mean even lower capacity utilization and lower profitability since capital will be underutilized.
• In June, the stock market was at a record high and yet the investment rate did not rise.
• Data from the Monitoring Indian Economy Pvt. Ltd. shows that investment proposals are at a 14-year low. In the last year, the RBI has cut interest rates four times and by a total of more than 1%; but the investment rate has not budged.

Impact of announcements

• The government has been in denial but now experts in the Economic Advisory Council to the Prime Minister, in NITI Aayog and the RBI have admitted that there is a slowdown. The Ministry of Finance has now gone into hyper drive to make major announcements so soon after the full Budget was presented in July. This is an admission of there being a slowdown in the economy.
• Unfortunately, none of these announcements will lead to a recovery since they do not address the source of the problem.
• An hour before the latest data on economy showing slowdown was to be announced, the government announced the big bank merger. Was this to divert attention from the data to be released? Be that as it may, bank mergers will have little impact on the immediate problem of the slowing economy. It may only further disturb a major chunk of the banking system in the coming year — and that would not be good for a slowing economy. The package for the automobile sector or making banks pass on interest rate cuts to businesses, announced a little earlier will also have little impact since the problem did not originate there.
• The announcement of a transfer of ₹1.76 lakh crore from the RBI to the government will only cover the shortfall expected in revenue (which is a result of an unduly high projection of revenue growth). It will allow the government to maintain the fiscal deficit target at 3.3%. But, this will not provide the needed stimulus. For that the fiscal deficit would have to be allowed to rise or there has to be an increase in expenditures on the basis of mobilization of additional revenues. The fiscal deficit today is at about 9% if the States and the public sector units are taken into account. And how much can the government raise is a political decision that has not yet been taken.

The source

• So, where does the problem originate from? It is from the unorganized sector which has been in decline since demonetization. It was further hit by the Goods and Services Tax though it is either exempt from it or there is a simplified provision for this sector. This sector producing 45% of the output and employing 94% of the workforce, has been in decline, which is pulling down the rate of growth of the economy. But, why does it not show up in the growth data?
• In simple terms, the reason is that the data for this sector is collected once in five years (called reference years) since the sector has tens of millions of units for which data cannot be collected monthly, quarterly or even annually. In between the reference years, the data is only projected on various assumptions.
• The government document on estimating advance annual estimates and quarterly estimates makes this clear. For estimating quarterly growth it uses, “latest estimates of Agricultural Production, Index of Industrial Production (IIP) and performance of key sectors like, Railways, Transport other than Railways, Communication, Banking, Insurance and Government Revenue Expenditure”. Except for agriculture, these belong to the organized sector of the economy.
• Even for the annual estimates, basically data for the organized sector are used — like in the case of mining, banking, hotels and restaurants, and transport. For construction, steel, glass, etc are used which are also derived from the organized sector production.
• Thus, the implicit assumption is that the organized sector can be a proxy for the unorganized sector. But with the economy suffering three shocks in quick succession over the last three years which adversely impacted the unorganized sector, this assumption does not hold true. Most of the experts have implicitly accepted the government’s fallacious argument and have thus fallen behind the curve.
• In brief, the official data only represents the organized sector. To incorporate the unorganized sector, data from alternative sources need to be used.
• The decline in the workforce, the rise in the demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act, etc. suggests that the unorganized sector has declined by at least 10%.
• If this is taken into account, the current rate of growth is much less than 5%. If the government does not accept this, then it must reveal the rate of growth of the unorganized sector that it is using in its estimates and which is not based on using the organized sector as a proxy.

Waiting for reforms

•  The stimulus incentives hold promise, but structural reforms are nowhere on the horizon
• People who have been yearning for major economic reforms from the Narendra Modi government, it seems, will have to wait to have their dreams come true. Finance Minister Nirmala Sitharaman on Saturday presented the third round of stimulus measures to resuscitate the struggling economy, but once again these have largely failed to live up to the initial hype around them. The previous two rounds of the stimulus plan, presented at press conferences held by the Minister over the last few weeks, focused primarily on reviving the automobile sector, boosting the confidence of foreign investors who were spooked by the Budget announcements in July, and improving the health of dangerously fragile state-owned banks by doing everything short of privatizing them. This time around the focus has been on helping out the underperforming export and real estate sectors through piecemeal fiscal reforms. Among other things, Ms. Sitharaman announced a new tax refund scheme and greater priority sector lending for the export sector to incentivize exports. It is expected that the new tax breaks to the exports sector will cause a dent of up to ₹50,000 crore to the government’s revenue.
• Further, external commercial borrowing norms have been eased to make it easier for Indian real estate companies to tap funds from abroad, and funds worth ₹10,000 crore have also been allocated to aid the completion of affordable housing projects. With lack of demand and major supply-side bottlenecks being the primary issues facing exports and real estate, it is doubtful whether the present measures will be enough to revive these flailing sectors.
• Overall, cutting across all three stimulus rounds announced till date, the government has been relying almost entirely on providing fiscal relief, in the form of tax cuts coupled with a tiny amount of government spending, to wade through what seems like a structural crisis in the economy. The hope seems to be that these measures combined with a looser monetary policy stance adopted by the RBI will boost spending and revive growth.
• This is, however, a far cry from what many expected from a government that promised radical structural reforms when it rose to power in 2014.
• Without enacting any major supply-side reforms like land and labour reforms that can raise potential growth, it is also hard to see how greater spending can raise growth for very long. The government may believe that the present slowdown, marked by five consecutive quarters of dropping growth, is merely a cyclical one. But given the size of its victory in two consecutive elections, the government should aim higher by trying to push through long-pending structural reforms that can raise India’s growth trajectory to the next level.
• Perhaps the most abiding image of the recent saga of the Chandrayaan-2 mission, which came tantalizingly close to getting the Vikram spacecraft to make a soft landing on the lunar surface, was that of the Prime Minister embracing and consoling the chairman of the Indian Space Research Organisation (ISRO). That single act said eloquently what words could not have expressed adequately: that though the mission could not achieve one of its prime objectives, it had notched up a series of outstanding successes along the way for which the entire nation is proud.
• As the grand finale unfolded on television screens all over the country, despite the let-down at the end, a strong wave of support and sympathy was visible for the band of dedicated scientists and engineers of the space agency, who had given their all for the success of the mission. Watching the sequence of events, as a former railway professional, I could not help but reflect on the sharp contrast of the Chandrayaan-2 with another initiative, this one by the Indian Railways, which succeeded in achieving its objectives on schedule and yet, within a few months, unravelled in an unexpectedly different manner.

A technological marvel

• A little less than a year ago, in October 2018, the country was celebrating a technological achievement of a purely terrestrial nature: the successful rolling out of a gleaming state-of-the-art, semi-high-speed (of 160 kmph-200 kmph speed) train set called ‘Train 18’ in an incredibly short time span of 18 months. If Chandrayaan-2 brought India close to joining the select band of three countries in the world to have successfully achieved a soft landing on the moon, Train 18 propelled India into the exclusive club of about a half a dozen countries in the world that have the capability to turn out a brand new design of a high-speed/semi-high-speed train set in such a short time.
• Prime Minister Narendra Modi flew down to witness the landing of the lunar vehicle at the satellite tracking centre in Bengaluru. A few months earlier, in February, he had flagged off the inaugural run of the Train 18 as ‘Vande Bharat Express’ in Varanasi. The train has provided a trouble-free performance in the last six months. Unfortunately, perhaps it was the outstanding success of the Train 18 project that proved to be its undoing.
• The unravelling had commenced even before Train 18’s inaugural run as Vande Bharat Express. Following top-level changes in the Railway Board at the turn of the New Year, a vigilance investigation was launched into certain alleged procedural irregularities and allegations of undue favours shown to a particular indigenous firm in awarding contracts for the crucial propulsion system.
• It was also reported that deviations had been observed from the specifications prescribed by the Research Design and Standards Organisation (RDSO). Meanwhile, the man who had spearheaded the Train 18 project — from its conception and design to its launch — as General Manager of Integral Coach Factory (ICF) and who retired at the end of last year, was not even extended an invitation for the train’s ceremonial inaugural run in February 2019. (In contrast, some former ISRO chiefs were invited to witness Vikram’s descent.)
• As though to add a touch of dark humour, a few months after the train’s inauguration, post the general election, it was announced at the highest policymaking level of the Indian Railways that “the Railways would be willing to start import of complete train sets from foreign suppliers if they agreed to establish the coach manufacturing facility in India”. (This is equivalent to ISRO going in for import of its rockets and space vehicles from the U.S. or Russia!)
• With the train set’s production having come to a halt in ICF, Chennai, despite tenders having been floated, Project 18 is as good as dead now.
• What explains this vast divergence in the way the two missions, Chandrayaan-2 and Train 18, panned out? The two organisations, ISRO and the Indian Railways, are as different as chalk and cheese. Though both the public sector organisations have notched up a series of successes that truly reflected the spirit of ‘Make in India’ long before the phrase became fashionable, their objectives and organizational structure are entirely different.
• While ISRO functions mostly in ‘mission mode’ to achieve specific goals of a mission, the Indian Railways operates normally in ‘maintenance mode’, to keep the wheels of the railway network moving as efficiently as possible with the least disruption. This aim is achieved through more than a dozen functional departments that normally work in close coordination. Only certain specific projects or initiatives are undertaken in ‘mission mode’. The Train 18 project was one such undertaking that required the planners to cut red tape and reduce needless procedural hassles.
• It is likely that in the process, certain ‘sacrosanct’ boundaries of departmental silos were breached for no other reason than to speed up decision-making.
• Impact of internal turf wars
• It is not the intention here to pass judgments on the rights and wrongs of actions and decisions that enabled the launch of Train 18 in record time, or of the subsequent decisions that effectively derailed the mission. What, however, is of public interest is the enormous damage that the scourge of interdepartmental rivalries and internecine turf wars within the Indian Railways has done to the organizational morale and synergistic functioning of the nation’s prime public transporter. Unfortunately, Train 18 appears to have become the latest victim of this age-old malady of the Indian Railways.
• A committee of experts under economist and NITI Aayog member Bibek Debroy, tasked among other things to suggest ways of breaking down departmental silos within the Indian Railways to improve efficiency and speed of decision-making, gave its recommendations in early 2015.
• The ‘Mission Train 18’ episode is proof, if any evidence is at all required, that nothing has changed since then and that the departmental silos are alive and well. It is futile to expect the techno-bureaucracy of the Indian Railways to reform itself.
• The ball is in the court of the political leadership to push for reforms in this area. Otherwise, the Indian Railways will continue to notch up more successes like Train 18 that fade into oblivion, unlike ISRO where, it seems, public opinion reckons even a failure as a victory.

Mains Questions

1. J&K reorganisation decision is taken by the Govt. of India for a better future for India as a unit and Kashmir people specifically but many constitutional & legal challenges are also raised by experts. Comment on those challenges.(250 words)

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