25 Jun 2019 21:15 IST

Govt should focus on shoring up banking, legal processes

Speedy bad-debt recovery and financial stimulation will improve investor sentiment, boost growth

India is one of the fastest growing economies of the decade with growth mainly consumption driven. Despite its accelerated expansion, India has lost its status of trade-surplus economy, with the last monthly positive net trade reported in 2002. The most significant contributor to this issue is oil imports. India is the third largest importer of oil, importing worth $87.68 billion as of 2017-18, with the transportation sector accounting for the maximum consumption.

Since the Organization of the Petroleum Exporting Countries (OPEC) exercises a significant influence on oil production levels, any volatility in oil prices will have a substantial bearing on India’s inflation and current account deficit.

The Indian government has been striving to counter the issue through various initiatives such as Make in India in segments including electric vehicle (EV), but the impact has been delayed, mainly due to the image of protectionism and bureaucracy among foreign investors. Protectionist measures are initiated in the interest of local suppliers. India reported its highest FDI of $42 billion in 2018, but the challenges of a lumbering bureaucracy persist.

Despite the overall improvement in ease of doing business, the ground reality of starting a business and enforcing contracts is still challenging as showcased by the subtle increase in ranking for those sub-categories.

 

 

Considering the nation’s ambitious economic targets and the sense of urgency, the government should prioritise cutting flab in the bureaucracy and putting in place protectionist measures for cleaner innovative technologies such as EVs. Such actions will undoubtedly quicken the pace of development for the required infrastructure and keep a check on oil imports.

Lending activities and credit growth play a defining factor in determining economic performance. In recent years, stressed loans or non-performing assets (NPAs) to the tune of $190 billion have come to light with the figure expected to rise further. Even after the launch of the Insolvency and Bankruptcy Code (IBC) in 2017, only one-third of the cases have been resolved within the stipulated time frame. The delay in transactions due to prolonged legal battles have hampered investor sentiments.

The stressed assets have made the RBI more hawkish, and banks have become increasingly averse to granting loans. This decrease in credit has prevented private investments and led to jobless growth. Therefore, the banking system and the lending mechanism need a permanent solution; quick fixes such as asset restructuring companies will not be sustainable.

The government should focus on improving both banking and legal processes that facilitate fast-track resolution of insolvency. Speedy recovery of bad-debts and financial stimulation will improve investor and lender sentiments, promoting growth prospects and job opportunities. Beyond NPAs and discovered frauds, many companies stay engaged in the earnings management, forming shell companies and tax evasion, which in turn reduces tax collection by the government.

Other than the big four auditing firms, the audit committee, RBI and SEBI should also be held accountable for their responsibilities. The law needs to be strengthened and made efficient in all domains. Over the years, the lawbreakers even after causing severe damage to the economy, get away unscathed by exploiting inefficiencies in the legal processes.

Finally, mitigating the humongous economic issue of agrarian distress must be a priority. As per the Centre for the Study of Developing Societies (CSDS), 76 per cent of youth belonging to farming households want to give up farming — a decision that can be attributed to low income in the industry, with almost 50 per cent of farmers living below the poverty line. The evidence comes from the fact that agriculture contributes only 15 per cent to the GDP, whereas the sector employs 55% of the population.

According to RBI, the situation has aggravated recently as the farmer’s income growth is stagnant since 2014 with negative growth shown in 2018. Besides repeated losses, 70 per cent of farmers specified destruction of crops because of unseasonal rains, droughts, floods and pest attack. Besides more efficient market mechanisms for farm inputs, financing, and sale of output, the government can expedite the use of Smart Crops, Polyhouse Farming and Drip Irrigation techniques.

The National Innovation in Climate Resilient Agriculture says the steps would result in a 20-40 per cent increase in productivity, 15 per cent reduction in input costs and 15 per cent increased use of dry-lands, and thus a drastic drop in crop income variability. Such sustainable approaches would enable the Ministry of Agriculture & Farmers Welfare to double farmers’ incomes by 2025.

(The writers are pursuing the EPGP 2019-20, One-Year MBA at IIM Bangalore.)

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