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Key Takeaways

On 07 August 2020 Confederation of Indian Industry (CII) and Vivekanand International Foundation (VIF) jointly organized a panel discussion on Indian Economy – Today and Future Prospects. The session deliberated on the following issues:

• Overall economy & sectoral perspectives
• Immediate, short term and medium-term measures needed from the government to boost growth
• How can Atmanirbhar Bharat Abhiyaan support the recovery and help the economy sustain the medium-term growth?

Remarks by Dr Arvind Gupta, Director, VIF

1. The country is passing through a very difficult time facing a health crisis, an economic crisis and a security crisis which also has an economic dimension, simultaneously. Hon’ble Prime Minister has highlighted the crisis as an opportunity to reform the economy. Subsequently, the government has rolled out the PM Garib Kalyan Yojana and Atmanirbhar Bharat Abhiyan packages to support the vulnerable sections of the society and sectors such as MSMEs, Agricultural, rural markets, etc.
2. There are some green shoots visible in the economy with few sectors reaching pre-pandemic levels of activity. However, we still have a long way to go. The government data indicates that the eight core sectors of the economy are not doing well, exhibiting negative growth rates. The financial sector hasbeen under stress, with RBI expressing concerns about rising NPAs in the banking sector.

Panel Discussion

Context Setting

3. GDP growth in FY2019-20 was recorded at a low of 4.2%. RBI expects the real GDP growth for FY21 to remain in the negative territory. A protracted spread of the pandemic remains a downside risk to the economy.
4. Recent high-frequency data has shown some signs of revival in the economic activity in May and June post the phased relaxation - peak power demand, increased e-way bill generation, etc. However, July saw a departure from this trend, with railway freight earnings down by 12% for the week ended July 26 as against a decline of 7.7% in the previous week. The power generation in week ended July 20 was low by 2% compared to the same period in 2019 and further widened to 7% in the following week
5. As on July 30, CMIE data reported an unemployment rate of 7.5%, which is lower than the pre-Covid-19 monthly unemployment rate of February 2020. However, there is a concern over the quality of jobs created, which are mostly in the informal sector The urban unemployment rate has not improved as much as the rural unemployment rate. The urban unemployment rate continues to be higher than the pre-Covid-19 levels of February.
6. RBI Consumer Confidence Survey, conducted across 5,342 households, indicates that the consumer confidence has plummeted in July 2020, with the current situation index recording its all-time low. However, the future expectation index has gone back into positive territory, indicating expectations of a recovery ahead.



Macro-economic Perspective

7. The results of the RBI’s Consumer Confidence Survey imply that people will draw down on their savings now to keep their lifestyle intact, in anticipation of a pickup in the economy next year. Hence, there will be a resurgence in consumer demand, but upto a point, which will be a function of savings available with people.

This provides a finite time horizon for the government to act. If the economy does not pick up in this period, then it is likely that people will run out of savings, leading to reversals in growth recovery.

8. The Atmanirbhar Bharat package has provided modalities for enhancing production in the economy. However, it does not focus on stimulating demand.

Give the structure of the Indian economy, wherein MSMEs account for a large part of jobs for the lower middle-income segment, Government needs to look at increasing public expenditure in areas which create demand for MSMEs.

9. The MSME sector has a unique characteristic – once income flows start, the sector generates its own demand. The sector can be kickstarted in the following ways -
• The government should release its outstanding dues to MSMEs providing them with the much-needed cash inflows.
• Focus on smaller infrastructure projects where MSME participation is high. Instead of large infrastructure focus should be on projects such as upgrading existing roads & highways, slum upgradation projects, urban renewal projects, etc.

MSME Perspective

10. Businesses around the globe are looking at local and secondary supply sources to de-risk supply chains. This provides an opportunity for the Indian MSME sector to grow.Rather than just focusing on assembly of end-products in the country, the government should identify import substitutes in key areas and incentivize domestic MSMEs to manufacture them in the country.
11. Much has been done on Ease of Doing Business, however much more needs to be done to improve the ground level situation, specially for MSMEs. Other areas that require focus are reducing cost of capital, incentivizing and motivating MSMEs to adopt technology and facilitating market access.
12. Defence sector is a huge area of opportunity. However,there is a need to fast-track approvals for indigenously produced goods. Currently it takes 3-5 years for the approval of just the prototype.
13. Government should help build ‘Brand India’ for employment intensive sectors and where India offers immense potential - sectors such as textiles, leather, agro produce.
14. Currently there is fear of pandemic amongst people, dampening sentiments. The frequent regional lockdowns are hampering the recovery process and affect the daily wage earners the most. The fear needs to be addressed and replaced with a more positive approach of practicing precaution and safety.

Financial Sector

15. The stock markets have recovered 90% ground which they lost between the high of 12th Feb and the low on 23rd March.
16. The stock market and real economy donot necessarily follow each other. The stock market rise can be explained by two factors:
• The global liquidity, specially from USA, European Union and Japan which is seeking higher returns in emerging markets. India has a weightage of 9% in the Emerging Market Morgan Stanley Index (MSCI).

Currently India is one of the expensive emerging markets, with 24 times forwards earnings. While between Jan-April 2020 India lost FII money, FII’s were net positive in India, for each of the months – May, June and July. This indicates that the global investors are confident of India’s growth potential in the medium to long term.

• Historically, daily flows into the market have been in the range of Rs 40,000 to 45,000 crores. Statistics of May, June and July indicate flows of Rs 55,000 to 60,000 crores. This extra liquidity is coming in from retail investors; the institutional investors have in fact net redeemed.

This is a worrisome trend. If the corporate earnings do not recover, the markets can fall, and retail investors can get hurt and experience shows that once the retail investors are hurt, it takes a long time for them to come back to the markets.

17. The market rally is not broad-based. It is driven by a few stocks and a few sectors
• The top 10 stocks in NIFTY50, led by Reliance, HDFC, Kotak etc are driving the rise. Companies with good and clean governance are attracting capital, showing that the markets are rewarding companies with good management, which is a good trend.

  In essence there is enough capital available for companies with sound business models and good corporate governance.

• In terms of sectors digital, automation, technology, pharma and chemical companies are finding favour with investors.
18. SEBI and RBI have been doing a stellar job in supporting the financial markets and the financial sector. SEBI’s initiatives such as changes in the rules related to rights issues have resulted in 10-12 marquee rights issues in the market, enabling coporates to raise capital. RBI’s liquidity support, specially to NBFCs which further finance the MSMEs, and the one time re-structuring are very important interventions.

Consumer Durables

19. Demand has come back strongly in this industry. With the industry seeing increased demand for the past three months, it is not just pent up demand. The industry has got back to last year’s numbers despite multiple lockdowns across the country.
20. Worries that were centered around demand have now changed to supply. Repeated local lockdowns are disrupting reopening of factories, warehouses and port movements, leading to disruptions in national supply chains.
21. Cost of doing business in India is significantly higher compared to other comparable countries. Factors likeinefficiencies in road transport, rail transport, delays at ports, quality of infrastructure, etc. need to be addressed to attract investments into the economy.

Engineering, Procurement and Construction (EPC)

22. The biggest challenge that most companies in the B2G space face is delays in payments from the government, impacting cash flows. The outstanding dues from the government have been building up since early 2019 and are at unprecedented levels now. Repayment of the dues at an accelerated manner will aid the demand and investment recovery.

Tourism, Travel & Hospitality

23. Given that this industry is based on derived demand, this industry is the first to be impacted and last to recover. The sector is under great stress. Tourism supply chains (which includes travel agents, airlines, restaurants, etc.) have broken down and are not expected to recover for the next 6-18 months.
24. In FY18-19, the industry handled over 10.5 million tourists, more than 5 million visiting NRIs, 1.8 million domestic tourist visits. The number of outbound tourists on the other hand was much larger at over 26 million.
25. The sector contributed 9.2 per cent to the Indian GDP and USD 28 billion in foreign exchange earnings. The latest projections indicate a loss of Rs 15 lakh crore for this sector for FY21, up from the Rs 5 lakh crore projected earlier in March this year. 70% of the workforce in the tourism sector is at the risk of losing their jobs. Cumulative job losses for this sector is now estimated to be 4 crores, up from the earlier estimate of 2 crores in March.
26. Going forward, the three focus areas should be
• Urgent fiscal support to ensure survival
• Support for the job losses (especially for the large unorganized sector)
• Generating demand– In the short-term, we should look at boosting domestic tourism in the country. In the long-term, measures such as a National Tourism Policy, changes in visa polices, lowering GST rates, etc. will boost the sector.

Other Key Points

27. The reduction in corporate income tax rates in September last year, extending a concessional rate of 15 per cent to new manufacturing units, was a strong signal to that India was looking at becoming the factory to the world. This initiative should now be followed up by land and labour reforms to attract large investments in manufacturing.
28. Other recent government schemes to promote manufacturing in the electronics sector – the Phased Manufacturing Program (PMP) and Production Linked Incentives (PLIs) should be extended to other sectors, where India wants to be global champion.
29. A certain degree of protection is desirable, especially for our MSME sector. However, as we have learnt from our own history, import protection gets driven much more by individual interest groups, rather than by overall macroeconomic considerations. If the government can resist the individual lobby and raise the overall average level of protection across the board, then it may not be a bad thing. But if the import protection becomes selective, we may end up making the wrong choice and create a mess that took us 15 years to get out in the past.

Remarks by Shri Rajeev Chandrasekhar, Hon’ble Member of Parliament (Rajya Sabha) & Vice-Chairman, Centre for Economic Studies, VIF

30. The conventional economic theory and the economic models cannot predict the impact of COVID on the economy. Therefore, economic policy making must be careful, calibrated, and should worry about the downsides, rather than rushing into big-bang solutions that may have been the norm earlier.
31. Government’s response to the crisis has been on three lines – soft-landing the economy as the economy contracts, reboot of the economy and expansion phase (Atmanirbhar Bharat). These three phases are happening with some amount of overlap.
32. The opportunity to massively expand the Indian economy is a real and unprecedented opportunity which the government aims to leverage through the Atmanirbhar Bharat Abhiyaan. The government’s vision of Atmanirbhar Bharat is to create a globally competitive and self-reliant economy.
33. MSMEs, to a large extent, are a part of a wider global/national supply chain. It is the consumers of the MSMEs who need to be supported, in order to generate demand for the MSME sector. The RBI, through its recent policy announcement, has taken the first step to support the non-MSME part of the industry.
34. Our rebound and performance post-Covid-19 will be significantly superior to most of the economies around the world and a lot more sustained.

Key Recommendations

• Accelerated clearance of outstanding dues to the industry by the government.
• Public expenditure in small infrastructure projects such as upgradation of existing roads and highways, where MSMEs play a key role.
• Urgent support for the Travel, Tourism and Hospitality industry.
• Overall improvement in Ease of Doing Business, land and labour reforms, expansion of schemes like the PMP and PLI for electronics to other sectors, to attract investments in the economy,