24 Jun 2019 17:54 IST

Remove obstacles to economic development

The NDA govt has to tackle rising NPAs and falling investments, and boost manufacturing

Despite having a stable and strong government and huge investments in infrastructure, India’s growth has been declining for the past three quarters — 8 per cent in Q1, 7 per cent in Q2, and 6.6 per cent in Q3. Other significant issues are the high unemployment rate (highest in 45 years) and decline in FDI. The new government has a bumpy ride ahead of it with all these issues piling up.

The core issue is the decline in investments. The RBI has stepped in to correct this by cutting interest rates over the last two monetary policies but it has not helped in attracting more investments. In the latest review, it even trimmed interest rates further by 25 basis points to 5.75 per cent (10-year low). Will this move by RBI trigger any inflow of investments? The answer would be a “no” because of the state of the economy right now, in particular the several challenges facing the banking system.

Key concerns

The foremost issue is the NPAs. Even if the RBI cuts interest rates banks are not transmitting the same by pruning lending rates accordingly. First, the government, the RBI and SEBI have to correct the NPAs issue. Secondly, the change in the policy stance from neutral to accommodative cannot drive investments but it will certainly smoothen the process of lending and borrowing. As part of correcting the banking sector, the government has merged Dena Bank, Vijaya Bank and Bank of Baroda. This is a commendable initiative and the government has to take more such reformist decisions.

The manufacturing sector is one that can create and sustain a greater number of jobs. The unemployment rate can be minimised by boosting the manufacturing sector. The mistakes and policies of previous governments have resulted in the manufacturing sector languishing. Policies that have remained unchanged since the early 1990s, outdated labour laws, and inadequate infrastructure have made it difficult for entrepreneurs to step into the manufacturing sector.

A large part of China’s success can be attributed to its removing obstacles to the growth of manufacturing, while in India it has always been the services sector that has been in focus and received the bulk of government support recently.

Manufacturing sector

A few other major issues bedevilling the economy are lack of continuous power supply to industrial and farm sectors, , the agricultural crisis, and unskilled labour. With technology changing rapidly, and industries moving towards automation, India should produce more skilled labour and retrain the labour force to be capable of handling production that meets global standards.

The government should encourage setting up of foreign educational institutes in India, as China is doing. On the brighter side, the NDA government has been spending a lot on infrastructure such as ports and airports, developing smart cities, roads and electrification.

Although there has been a drastic decline in key economic growth parameters, and despite issues like demonetisation having dealt a blow to MSMEs, apart from NPAs, the agrarian crisis, low investments and declining exports, people have voted the NDA back to power. This shows that people are expecting a lot from this government, in terms of removing obstacles to economic development, poverty eradication and rationalising of subsidies. Modi has to stick to his 2014 election promise of ‘minimum government, maximum governance’.

(The writer is in the PGPM Class of 2019-20, Great Lakes Institute of Management, Chennai.)