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10 Things Government Can Do To Raise The GDP Growth

Growth has momentum and slowdown has inertia

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There is concern about the speed and nature of the government and industry's response, and will these actions turnaround things immediately, or not. Pixabay

BY K YATISH RAJAWAT

Growth has momentum and slowdown has inertia. The Indian GDP growth has fallen to 5 per cent in the April-June quarter, from 8 per cent. This slowdown can only be reversed if both short-term and long-term reforms are undertaken.

The fall in GDP growth is sudden and dramatic. Till now, while only businesses were talking about the slowdown, it is now a reality for the country. People worry about how bad things are and is this bottom or the beginning of a slowdown.

There is concern about the speed and nature of the government and industry’s response, and will these actions turnaround things immediately, or not.

These concerns and perceptions need answers as they affect consumer confidence and consumption. Acknowledging the problem is not a sign of weakness or acceptance of any blame. It’s a fact that leadership in the corporate sector has failed to recognize the major transition taking place in their sector that has affected consumer demand.

Sectoral collapse has happened because of poor business decisions in banking, real estate, construction and lately in non-banking finance companies (NBFCs)/housing finance companies (HFCs). Now all these sectors are looking for stimulus packages to bail them out from their mistakes.

GDP, Economy, Government
Stacks of Myanmar kyat are seen on the counter before a client collects them, at a bank in Yangon, Myanmar October 19, 2015. IANS

Take the auto sector, for example. It did not prepare for shifts in consumer behaviour and market needs. They contribute almost 6 per cent to the GDP and offer employment to 37 million people and are clamouring for stimulus on behalf of their employees.

The stimulus has to be for both employees and corporates. The sector is asking stimulus to protect jobs, but it does not mean it will happen as they move to electric vehicles (EV).

EVs have a fraction of moving parts as compared to an internal combustion engine. The engine and drive line are two crucial components of the internal combustion engine that contribute 50 per cent of the auto component industries’ revenues. The move to EV will disrupt the supply chain of components at one end and maintenance and repair on the other. This needs specific incentives to upskill employees to maintain, repair or make electric vehicles.

Upskilling of mid-level workers is the core component of all sectoral stimulus packages. The disruption in industries is not cyclical or because of economic slowdown. There is a structural shift in many industries because of technology or shift in consumer preferences. Automation is affecting jobs in both manufacturing and services, which displacement is also affecting the consumption cycle.

The stimulus for auto companies has to promote investment. India needs an investment of $40 billion in batteries for EVs. Auto companies can get incentives for making this investment. They can be incentives to shift existing production lines to electric cars.
These are, however, palliative measures and will not turnaround the economy The bigger issue is revival of consumption demand.

The government has had discussions with several sections of business and economists over the last few weeks. It has plucked out all the prickly issues which created a negative perception and eroded trust. But if a tyre is losing air pressure removing nails from the road ahead will not stop the air from leaking.

Action has to inspire confidence among consumers to spend and for industry to invest. Removing taxation on foreign portfolio investor and other prickly issues is a hygiene factor. It shows the government is correcting mis-steps faster. Addressing it within a week, which the Finance Minister Nirmala Sitharaman did shows the speed of response.

This is important as it will bring back the confidence in the industry, investors and market. But the confidence to spend or even pay EMIs has to be restored.

It is equally important to set the right expectations for a return to normalcy or a turnaround in growth. The massive mandate this government received shows the expectation of the common man. Not setting the expectation right or distorting the timelines will not serve to inspire consumer confidence. People are pragmatic and patient if they understand the time it will take to come out of the current situation. They know there are no shortcuts out of slowdowns.

GDP, economy, Government
Both merger and governance reforms were important but are obviously not sufficient from the slowdown point of view. Pixabay

The current initiatives are either short-term measures or long-term reforms. The consolidation of Public Sector Banks (PSBs) announced on August 30, falls into the latter category. It will not turnaround the banking sector, ease the credit flow or even improve the transmission of interest cuts — the three most important problems contributing to the slowdown. The consolidation will take time.

The consolidation of the PSBs is a structural reform much needed, long overdue and may reduce the recapitalisation requirements. The governance reforms will improve the process of supervision, hiring and compensation. It will not change the credit evaluation, disbursement and monitoring of loans, which is the core problem in PSBs.

The culture of poor evaluation of borrowers and lack of risk mitigation has contributed to the non-performing asset (NPA) mess in the PSBs. This culture cannot vanish overnight as it’s entrenched in processes and behaviour.

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Banking leadership can use the disruption to overhaul the culture and build a new system and processes. If they get sucked into the merger and take their eyes off credit growth, customer retention, their merged entity will be weaker than the sum of the parts.

Both merger and governance reforms were important but are obviously not sufficient from the slowdown point of view.

To kick-start the consumption cycle money has to go into the common man’s pocket. This can happen by reducing income tax for the lowest slab, as recommended by the Direct Tax Code report. It can be done by making GST filing quarterly for MSMEs with less than Rs 10 crore turnover to ensure they survive the slowdown. The GST Council can look at reducing rate slabs and reduce the overall burden on corporates.

Immediate steps:
. Give auto sector incentives to invest and shift to electric vehicles
. Incentives to auto sector employees to upskill on electric vehicles
. Change GST collection to quarterly for companies below Rs 1 crore
. Reduce the GST slab rates
. Adopt the Direct Tax Code, cut income tax for the bottom slab
. Improve credit flow to both consumer and industry
. Reduce real interest rates by 135 basis points as cost of capital has to come down
. Change the credit culture in public sector banks
. Stimulus should drive investment, upskilling for displaced employees
. Factor market reforms, including bringing the cost of land down. (IANS)

Next Story

Here’s how Climate Change has Affected the Economy

Climate vs. Economy: Four Lessons From a Year of Reporting

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Climate economy
People attend a climate change protest in Brussels, Belgium. VOA

Does fighting climate change mean wrecking the economy?

That’s the question my editor posed to me about a year ago. It has been the focus of my reporting ever since.

The rhetoric from climate change skeptics suggests it would. President Donald Trump has made canceling Obama-era greenhouse gas regulations a central part of his tenure. Economic rationales are always front and center.

Meanwhile, Democratic presidential candidates say they will create millions of jobs by transforming the energy system to carbon-free sources.

Climate economy
A graph depicting how the economy is growing in Massachusetts despite the climate change. VOA

Job killer or job creator? Leaving aside for the moment the fact that climate change is already imposing enormous costs that are only becoming worse, I went looking for answers in Massachusetts, Wyoming and Colorado.

Here’s some of what I learned. It’s not simple. And much remains to be seen.

1. Where steps have been taken, the economy has kept growing. 

Take Massachusetts, for example. The Bay State passed the Global Warming Solutions Act in 2008, calling for an 80% reduction in greenhouse gases from 1990 levels by 2050. Massachusetts requires power plants to pay for their carbon dioxide emissions. The state was among the first to require power companies to generate a certain portion of their electricity from renewable sources. The government offers rebates and incentives for renewable energy, energy efficiency, electric vehicles and more.

Greenhouse gas emissions have come down by 17% from 2008 to 2017 in the state.

Meanwhile, Massachusetts’ economy has continued to grow. The state’s total output went up by 19% in that period, outperforming U.S. economic expansion as a whole by 3% in that time frame.

Employment went up in Massachusetts by 9%. The state has invested in growing a clean-energy economy. Jobs in renewable energy, energy efficiency and related areas have grown by 86% since 2010 and now make up more than 3% of the state’s workforce.

It’s hard to know, though, to what extent the state’s climate policies were responsible for either the greenhouse gas reductions or economic growth. From 2008 to 2017, carbon emissions went down in every state but six: Idaho, Nebraska, North Dakota, Mississippi, Texas and Washington. GDP shrank in just four states: Connecticut, Louisiana, Nevada and Wyoming.

That’s largely because cutting carbon has become much easier to do with the rise of natural gas and renewable power.

2. Some of the most significant greenhouse gas reductions have happened not because of state policies but because of dramatic shifts in energy markets.

Climate economy
Wind turbines produce green energy in Nauen near Berlin, Germany. Stephan Kohler, who heads the government-affiliated agency overseeing Germany’s electricity grid. VOA

The biggest factor lowering carbon dioxide emissions nationwide is that natural gas has replaced coal as the main fuel for electric power plants.

Burning natural gas generates the same amount of energy with half the carbon dioxide emissions as coal. The price of natural gas has plunged as drilling technology has made the United States the world’s leading producer. That has helped drive a wave of fuel-switching at power plants across the United States. Coal generation fell 40% from 2008 to 2017, while natural gas climbed 47%.

Renewable energy is growing quickly, but it still makes up a small portion of the power supply. Wind generated just 6.5% of the nation’s electricity last year. Solar produced 2.2%.

Wind and solar are starting to give fossil fuels serious competition, though. After dramatic cost declines over the last decade, these sources are now significantly cheaper than coal and often cheaper than natural gas, even without subsidies.

They need to replace fossil fuel generation much faster, however, in order to take a serious bite out of emissions.

3. Some good jobs are going away. Dealing with the changes is not easy.

Powering the nation is not the job it used to be. Coal once generated more than half the nation’s electricity. Coal mines and power plants are mostly unionized. The jobs pay well and provide good benefits for workers without a higher education.

Coal mining, however, employs 42% fewer workers than in 2011. More than 300 coal-burning power plants have closed or are slated to be shuttered.

There are growing opportunities in renewable energy and energy efficiency. The solar industry employed 242,000 people in 2018, for example, about 45,000 more than the coal industry.

The jobs are not equivalent. Many solar installation jobs are not unionized, don’t pay as well and have fewer benefits than those for people working at coal plants. And a solar farm doesn’t need many workers once it’s built, while a coal plant can steadily employ hundreds.

Workers hurt by the energy transition are a small part of the overall economy. But coal mines and power plants tend to be in rural areas without much else in the way of industry. When these jobs go away, the pain is localized but intense.

Some policymakers are trying to blunt the impacts. Last year, Colorado was one of several states that passed laws aimed at cutting greenhouse gas emissions and included provisions for a “just transition” — job retraining, economic development aid and other measures to help workers and communities find a life after fossil fuels.

Climate economy
Members of the European Parliament vote in favor of the Paris U.N. COP 21 Climate Change agreement during a voting session at the European Parliament. VOA

4.  No one is doing enough. 

The plunge in coal-fired power helped the United States cut its emissions by an estimated 2.1% in 2018. Since 2005, emissions are down 12.3%.

But the United States pledged to cut greenhouse gases at least 26% by 2025 under the U.N. Paris climate agreement. Emissions must go down by 2.8% per year on average to hit that target. It’s not impossible, experts say, but it’s a stretch.

The Trump administration is moving policy in the opposite direction, aiming to weaken fuel economy standards for vehicles, approving construction of a new oil pipeline from Canada and vowing to shore up America’s coal industry.

Meeting the Paris pledge is not enough, however. Scientists say the world needs to get to zero carbon emissions by 2050 to stave off a climate disaster. Almost no one is on track to do so.

Unless cost-effective carbon capture technology appears soon, natural gas will have to go. Transportation, the largest source of U.S. greenhouse gases, will have to go electric (or hydrogen or biofuel) much, much faster than it is. And someone will have to figure out what to do about emissions from energy-intensive industries like glass, steel, aluminum and concrete.

Also Read- People with Inadequate Food Access Likely to Die Prematurely: Study

Does fighting climate change mean wrecking the economy? Not necessarily. But the steps taken so far will not stop the climate impacts we’re already seeing from becoming much worse.

Can we stop climate change before it’s too late? No one has all the answers yet.

But something must be done. Each new climate-related disaster shows the cost of inaction is mounting.  (VOA)