Measures to tackle the economy

Relevance: Mains: G.S paper III: Indian Economy

Introduction

The finance minister recently announced a set of measures to boost export and housing sector.
The first is a new export promotion scheme for the remission of duties and taxes on the export product. This scheme will completely replace the Merchandising Exports from India Scheme (MEIS) and Rebate of State Levies (ROSL).
MEIS and ROSL will continue up to December 2019 and the new scheme will start from the New Year.
The second announcement is the set-up of 10,000 crore rupee special fund which will act as a special window for affordable and mid-income housing. It will provide the last mile funding for housing projects that are non-NPA and non-NCLT projects and are stuck due to lack of funding.

The general thought on these two announcements

These are a welcome step from government because of the following measures:

Any country cannot grow highly without export growth. Since 2011, the dollar value of merchandise export has stagnated and this will boost the Indian export.
Housing loans are relatively safe loans as the Mortgage Process Outsourcing (MPO) on housing loans are 1%. However, the problem is that the housing finance company are having an asset-liability mismatch.
After the IL&FS fiasco in which it has run out of money and was unable to service its repayment obligations, financial institutions have been now forced to lend for short period of time, leading to problem of less liquidity in the market.
In addition, FM announced Annual mega shopping festivals in India in 4 places in 4 themes (Gems & Jewellery, Handicrafts, Yoga, Tourism, Textile and Leather). This will result in reaching basic products from far stretched areas of India to common people.
However, these are partial measures as India needs a deeper analysis of the problem. India needs to work on core issues like agriculture for economic growth.

What are the factors that are impacting export?

India has never been an export-led country and its exports are 100 per cent flexible. They are elastic in nature and imports are perfectly inelastic in nature. Therefore, any devaluation in the currency leads to huge exchequer cost whereas exports are totally dependent upon international scenarios.
Despite high FDI and enough foreign exchange reserves, the low growth of exports are due to some measure that were laid down such as the GST mechanism which is creating a liquidity crunch problem (cash resources are in short supply and demand is high) in the market as the traders are paid later for their tax contribution. Hence, FM announced fully electronic refund of GST to exports by September 2019.
Moreover, the recent announcement of Revised priority sector lending (PSL) norms for export credit will release an additional Rs 36,000 crore to Rs 68,000 crore as export credit under priority sector.

What are the challenges in the export sector?

How is the housing sector is doing in India?

It is a safe sector to lend to but India has historically inherited unorganized housing sector.
The proportion of Indian housing purchase which is covered by mortgages is about 9 per cent. It is half the proportion in countries like China and Malaysia.
90 per cent of housing demands comes from things which are not directly affected by the mortgage or housing loan market. However, the speculative demand for houses (desire to have money for investments other than those necessary for living) in the housing construction industry is gone.

How much time will it take to revive the economic growth?

The concrete measures have been taken in the last one and half month despite a lot of media and people discouragement.
We are seeing administrative measures which have been pending since 1997 onwards. It will help to put the growth back on the track.
If the measures are kept up and if government abstains from fiscal spending, then it will slowly resolve the problem.
India, fortunately, has the buoyancy factor which will make it back on the economic growth track.

What are the positive factors which show that the economy will pick up soon?

There are already some positive result showing such as the monsoon has been good this time in India and some analyst has the projection that bank credit will go up by 15%, the steel and cement consumption has gone up by 8%, the FDI is also improving i.e. 50 billion in last 12 months.
The construction of the railway line has increased to 11.2 km per day from 5 km a day.

What should be done to push economic growth?

Release the stuck government payments. According to an expert, it is holding the growth rate up to 0.5 – 0.7 %. Around 11 lakh crore projects are stalled which needs to be cleared up gradually.
Some of the structural things needs to be taken up, for instance, India needs to tack advantage of US-China trade war.
Moreover, In India, most of the public procurement are going to procure just two products: Wheat and Rice which only accounts for 23% agricultural output. In other words, more than 70% of agricultural output does not have any direct support from government. This is a major challenge that needs to be addressed.
Also, the small industry workers, which are big part of Indian export industry, have been adversely impact by demonetization.

Way Forward

The recent announcement by Finance minister is good, but the core sectors that India have to worry about are agriculture, small industry manufacturing and corporate investments.
A mere 6 or 6.5% GDP growth will not lead the country to five trillion economies in future. For that, the country has to grow at about 8%. Also, the extent of job loss that we are seeing now is very large.
Export-led backward integration is the way to get to high growth.
The government should recognize, therefore, that there are deeper problems in the economy which needs to be resolved and it should look it into in terms of policy and not in just in the form of delivering benefits.
There are problems in the Indian economy and it is a fact that no country in the world is free from that. Fortunately, the government is trying to look into this matter but there is more room for the corrective measures.

Conclusion

The economy in real terms will grow only when the people will feel the growth. India is going through slowdown but due to oversupply of information, it is being taken in a very panic mode. The government is taking short term measures but there is a need for deeper analysis.