Leverage points in the Indian economy
There is broad consensus in India that the country is witnessing an economic slowdown currently. Such gloom has been validated by the recent GDP (gross domestic product) and IIP (index of industrial production) numbers as well as the rising NPA (non-performing assets) figures. While this contagion is working at its best across sectors, there needs to be an epicentre of this sluggishness, from where this epidemic spread to all sectors. Leverage points are segments within a complex system where a small shift in one factor can produce major changes in the larger system- the Indian economy in this case. The structure of our economy is such that the two leverage points in the system are agriculture and real estate.
The engine of growth since the past five-six years has been consumed and in the current scenario, when incomes aren’t increasing much, the way to boost consumption is debt. The banks, however, are not keen on expanding their balance sheets due to several problems of their own. Further, households are also not eager to take on more debt, fearing failures to repay in the future amidst an uncertain business outlook.
A deeper analysis of the agriculture sector reveals worrisome numbers. According to a report by the government of India, the share of agriculture and its allied sectors as a percentage of GDP at current basic prices has reduced from 18.5% in 2011-12 to 17.9% in 2015-16. For the same period, crop productivity as a percentage to agriculture, forestry and fishing has come down from 62.4 per cent to 58 per cent. The only bright spot is the milk and its product sector which grew at a CAGR (compound annual growth rate) of 11% and produced 32% more output than the combined output of paddy and wheat.
The second major leverage point is the real estate, which has seen a huge number of casual workers (mostly rural migrants) being employed for construction and related activities in the urban areas. Until a few years back, numerous major construction projects were in full swing and as a result, such migrants found a source of livelihood without much struggle. With the real estate sector facing strong headwinds, many companies in the sector have cut their hiring numbers and employing fewer workers, leading to a cascading effect in the rural disposable incomes, which were already severely affected by the crises in the agriculture sector.
On the brighter side, the current government has been very proactive in tackling this slowdown by announcing a series of comprehensive measures. The corporate tax cut, angel tax exemption and the recent FDI (foreign direct investment) reforms are some of the most important and widely appreciated moves. The rate cuts by the RBI over the past 18 months are a step in the right direction as it would help in improving aggregate demand numbers and bring back the growth figures to the pre-slowdown levels. What is also important is to go beyond the quantum to the specific areas that need attention. For instance, a reduction in taxes would help firms across the spectrum and make India an attractive investment destination internationally. Please click to learn more about FDI Policy and Taxation in India.
Nonetheless, the need of the hour is to focus on the leverage points in our economy - agriculture and real estate. A comprehensive assault on the factors hindering these two crucial sectors would have a multiplier effect on the economy. To that extent, the recent announcement for a 25,000-crore fund for the real estate sector is a welcome move by the government. Rural infrastructure is another area in dire need for reforms as better connectivity of villages would boost significantly farmers’ incomes. The agriculture sector requires supply-side measures because a supply shock in agriculture translates into a demand shock for the rest of the economy. The prices of onions are a classic example on how a supply shock in agriculture impacts rural consumption. All the measures to boost aggregate demand can work only if they are applied in conjunction with supply-side reforms in agriculture.