Indian Economic Crisis: 303 Is An Opportunity; Let’s Not Make It An ‘Error’

It is no surprise that the Indian economy faces several challenges to achieving and sustaining a high growth rate. With political stability and a proven track-record of reforms, it is highly likely that we will overcome these challenges.

Overcoming such challenges requires sound policymaking and avoiding tax-adventurism in the future. The concern should not be the immediate crisis, as healthy fundamentals combined with sustained reforms is going to help us sail through the present crisis.

But, for the short run, we need the government to use two of its powerful tools, fiscal and monetary policy, to support growth as consumption demand slows.

It is also important to revisit the way we handled our Non Performing Assets (NPA) crisis and whether our errors have only caused more problems for the economy.

For instance, high NPAs coincided with a regime of high real interest rates and credit growth was sluggish during this period. Would lower real interest rates combined with some fiscal intervention have revived growth and helped in resolution of NPAs?

Perhaps. This is extremely relevant for the case of the real estate sector, where inventories have been accumulating since the last five years if not more, and yet, prices are far from collapsing.

A major reason behind this is the inability of equity investments in such projects to absorb the extent of losses from reducing the price of real estate assets. It is important to remember that while prices are determined by demand and supply, supply is determined by the cost.

It is this factor that has thus prevented correction in the real estate market. A reduction in real interest rates, despite its slow transmission on costs of borrowing, will bring down Equated Monthly Instalments (EMIs) and this will make houses more affordable.

Let’s be very honest, the only way to revive the real estate sector is to push demand for real estate assets and this requires more-than-simple tax incentives.

A sharp collapse in real estate prices is likely to render many projects unviable, causing huge erosion of shareholder wealth, which has the potential to spill over to the balance sheets of our banks.

It would also be catastrophic for informal and semi-skilled jobs, as the real estate sector will find it difficult to deal with such widespread losses.

The Real Estate Regulation Act (RERA) did ensure that such a crisis doesn’t occur in future, as it restricts the use of funds by way of advance from real estate bookings, but the sector needs a roadmap to help navigate it out of the present crisis.

One must not sympathise with the promoters of these real estate companies as they’re responsible for this crisis, but prevention of existing wealth erosion and job loss is an important concern.

The need is to replace the management to ensure speedy revival of these companies and not delay the crisis long enough to cause loss of jobs and of shareholder value.

But the real estate sector is just one of the many sectors that are facing growth-constrictors. Some of these relate to policy issues, while there’s another set of problems that are to do with the current economic reality.

The important question is what should be done by the government to minimise collateral damage and revive our growth. The answer is to trust the experts.

Economic policymaking is far too complex, and a decision has significant second- and third-order effects.

A good example is the recent decision to impose surcharge on the super-rich and its applicability to trusts, which has left foreign investors deeply concerned with the direction of economic policymaking in India.

A major reason behind such policy choices is, perhaps, the lack of dependence on subject experts to help navigate through challenging times and consequently we look at generalists to help frame such policies.

Lack of thought on revival of the real estate sector, or an alternative plan to put the NPA mess behind us are a manifestation of our restricted policy choices and these restrictions are only due to the lack of imagination.

It is this lack of imagination that has resulted in prolonging the banking sector mess long enough to see it spread on to the Non-Banking Financial Company (NBFC) space.

If only someone would have advised the government about systemic risks and its implications for India’s financial system.

The handling of the financial sector stress also reflects the need to have an empowered committee of experts that routinely engages with the Reserve Bank of India (RBI), regulators and concerned ministries to ensure macroeconomic stability.

There are many challenges on the economic front, and we can no longer afford policy misadventures. Our administrative setup hasn’t been updated for far too long, and this ensures we continue making the same mistakes.

A mandate of 303 is a mandate that enables such upgradation and it is this upgradation that is likely to have a far more significant impact on long-term growth of our economy.

The government has made a move in this direction as it looks at lateral entries for senior administrative positions that were earlier given to civil servants.

While full-fledged administrative reforms must be duly considered, a good start would be to have seasoned experts in some of the key positions within the Finance Ministry.

Only with empowered experts can we pursue sound policies and only through sound policies can we transform our economy and achieve a sustained high rate of growth over 7 per cent.