The Economic De-bottlenecking - India
By: Amit Bhushan Date: 16th Feb.2020
While the government seem to be trying out quite a few things to shore growth, but that has mostly resulted in a copper. The growth has remain stubbornly struck to a lower groove. The key indicator like GST collection went down indicating weakness in economic activity, though this seems now to be reaching to its earlier levels. The government seems to be under pressure to spend its way via the infra route to push investments and growth. One of the challenges is that the private sector businesses and industry has been too slow to mend their ways in the changing politico-economic circumstances. Many of the business’s grouse has been idle capacity on the back of low demand and thus not warranting further investments for capacity expansion. This is even as there is very low level of investments for research and innovation in either the product or branding/communications or distribution etc. for which most remain dependent on foreign tech providers as well as following foreign competition within the country, with foreign competition almost always leading in most industry sectors. The lack of availability of easy credit as was available from public sector banks earlier is also cited as one of the reasons apart from challenges of negotiating with the new tax regime. The government on its part is trying to streamline the rules or ease of doing business and ironing out issues related to taxation as well as schemes for credit for tiny businesses and verbal assurances for FIs to lend to medium/large creditworthy businesses. Sectors such roadways, air travel and water transport including river transport is being pushed along with alternate energy usuage/sources such as natural gas and solar energy.
This is while the challenges in the rural sector in general and agri & allied sector continues. The social sector like schools/hospitals and higher education also facing some heat on account of weakness industry/services and exports. The real estate sector is also trying to adjust to the RERA law which is being seen as stifling the incentives for investors (read developers) who feel challenged in being able to deliver their past commitments under changed circumstances. Their is lack of rise in realty prices, which was on account of artificial shortage created by a collusion of forces in the sector, and has led to many erstwhile speculators looking at other areas and thus further weakening of support for the sector. There is some general weakness in demand which is likely to take time to shore up. Many of the small and tiny business dependent on the ‘consuming classes’ dependent on these sector are therefore sitting on timebomb as per some bankers as quite a few are taking advantage of newly available loans from banks to them. Fruther there has been weakness in shadow banking sector with defaults of a few institutions although hectic attempts to revive/sustain them are underway. De-stressing Banks and FIs for the baggage of past has been priority with various regulatory initiatives as well as injection from taxpayer’s money being thrown in. A host of incentives for large scale Foreign investors including some policy and regulatory actions to support these initiatives is also prioritized.
What some noise from government is suggesting is reforms in ‘factors’, meaning more liberal labour laws, land acquisition laws etc. There have been attempts to allow for an ‘exit route’ for investors/businesses so that risk taking is encouraged including an orderly winding down sans any legal/criminal liability where erstwhile laws were seen as too weak. The capital markets however is almost at a record high which means that despite of weakness, the organized sector is expected to do well. What this implies is that it is the not-so-well organized sector, read medium to small enterprises, are ones which are perhaps taking time to adjust. This is coupled by the fact that such entities form the bulk of businesses and even the government seems to be tilting backwards to protect these businesses, offering a long rope to them to adjust to changed regulations/situations. There may be a need for a much more liberal ‘Merger & Acquisition’ regime where both the organized sector can acquire such enterprises and also allow these enterprises to acquire and consolidate other units to gain in heft and organization and gain from capital markets based rewards at a later stage. This is likely to encourage many businesses to step up their efforts to adjust to the new scheme of things, allow the better organizers within the businesses to gain in short to medium term. Allowing a few specialized banks to offer financing for the purpose which is available only from select financiers and only to the strong listed entities may be hinderance for now. The government will need to quicken the transformation of the businesses as well as devise ways for Mergers and Acquistions even in the social sector whereby the better schools/healthcenters can grow faster and percolate management transformation. This would perhaps help the economy is short to medium term and de-bottleneck growth over medium to longer term. Let the ‘Game’ evolve….