Beware, the sag is showing: How to turn around drooping investment and job numbers

By: Rajiv Kumar

Two recent data announcements seemed to have escaped policy attention in ongoing exuberance about surgical strikes and hoopla about Brics and Bimstec in Goa. First, gross fixed capital formation (GFCF ­ broadly indicating total investment in plant and machinery) was reported to have declined for the second successive quarter, by (-) 3.1% in the April-June 2016 period. This is virtually unprecedented. To put this in context, GFCF had increased by 24.5% in 2011-12 when GDP growth was 7.0%. Negative growth of GFCF ominously implies a shrinking of the economy's productive capacities.

Second, growth of commercial bank credit to non-food sector plummeted to 8.3% in August 2016 as compared to its earlier peak of 38.4% in 2005-06. Bank credit to industry in August 2016 actually contracted by 0.2%. This implies that commercial banks have effectively stopped lending to the industrial sector. Again, to put it in perspective, growth in commercial bank credit to industry was 26.5% in August 2010 and 23.6% in August 2011! For it to have become negative reflects deep distress both in the banking and industrial sectors. Urgent action is warranted.

Investment weakness and loss in employment will have serious socio-political consequences. Symptoms are already visible. Patel agitation in Gujarat; Jat madness in Haryana; Gujjar movement in Rajasthan; and most recently Maratha mobilization in Maharashtra reflect rising impatience of India's much vaunted youth.

These agitating young people need employment ­ not just any work but high quality jobs that come with proper working conditions and reasonable remuneration.Prime Minister Narendra Modi would do well to direct his economic team to focus laser like on attracting more investment and generating more jobs, before it is too late.

First, the government must start a time bound and ambitious program of public housing for urban workers and landless labourers. Housing construction has extensive linkages in the economy and can spur both investment and consumption demand simultaneously . Advances in construction technologies (eg Moladi technologies) hold out the promise to complete construction of low income housing projects in less than six weeks! This has to be given far greater priority than smart city initiatives that will take years before any real investment takes place.

Second, active encouragement should be given to export oriented garments and apparels and tourism sectors, which have immense employment opportunities. The textile policy is a step in the right direction but needs far greater focus on implementing capacity expansion and providing real assistance to the medium and small exporters who abound in the sector. For tourism private and foreign operators and investors should be roped in to identify major constraints and address them urgently .

Third, RBI can help by ensuring a weak rupee and ignoring the advice of all those who call for a strong rupee on some pretext or the other. This will help labour intensive exports in general. India cannot hope to move to double digit and employ ment intensive GDP growth without significantly increasing its share in global exports that languishes at a measly 1.6%.

Fourth, the proposal to establish Coastal Economic Zones, put forward by NITI Aayog, is 30 years behind times and totally unworkable in Indian conditions. As early as the mid-eighties, the suggestion to design large EPZs on Chinese lines was rejected by the government as being impractical.Our federal democracy and constitutionally mandated individual freedoms and rights, combined with a hyper active media and problems of inter-ministerial and inter-government coordination, make these proposed zones a non-starter.

Fifth, India's stock continues to remain relatively high in global markets. This is, therefore, the right time to make the extra effort for attracting FDI for greenfield capacity expansion, hopefully in joint ventures with the second rung of private sector firms. These `next 500' or relatively smaller private sector firms ­ and not the top hundred corporates which constantly hog all the policy space ­ are natural partners to foreign investors. But they need a helping hand. NITI Aayog should extend that help and monitor potential joint ventures and FDI inflows while addressing any outstanding problems that discourage FDI.

Sixth, NITI Aayog should also regularly monitor and report on the progress made under `Start Up India' and `Stand Up India' campaigns as they are ostensibly the government's principal instruments for generating fresh employment. Good news on investment and employment should be publicized to improve presently sagging sentiment.

Seventh, it is evident that public capital expenditure had held up investment levels in 2015-16. This might well have to repeated this year, but without as much fiscal space.Hopefully the Committee examining this issue will soon submit its report emphasizing that minimization of revenue deficit is the real goal of fiscal policy . That will give government the flexibility to use borrowings as a counter-cyclical measure to trigger the investment cycle.

Finally the confusion about GDP growth estimates, which unfortunately persists, must be squarely tackled. The new series just does not inspire confidence.These high GDP numbers tend to create a sense of complacency that all is well in the economy , which patently is not the case.

I am sure that PM Modi recognizes that the state of the economy and much needed job generation will be key to NDA 's future prospects. Therefore, the time to act is now before persistent investment weakness and consequent lack of real jobs convert to unmanageable social unrest with seriously adverse political outcomes.

The writer is Senior Fellow at Centre for Policy Research, Delhi