ADL puts forward 10-point strategy for reviving India's economy

21 May 2020 Consultancy.asia

India’s economy is on the verge of facing its first recession in decades, and its impact could be immense, warns a new report by Arthur D. Little. Up to 135 million jobs could be lost and around 120 million people could be pushed into poverty, all of which will reduce consumer income, spending and savings.

In its report, Arthur D. Little explores how the Covid-19 crisis will impact India’s economy, outlining that while the country has been successful in dodging the previous global recessions of 2000 and 2008 – either maintaining slower growth and rebounding quickly – the world’s seventh largest economy will now have to take a hit. 

In the most realistic scenario, which the authors describe as a “W-shaped economic recovery” path, India is heading towards a potential GDP contraction of 10.8 percent in FY21. This in turn will spark a huge fallout of demand and jobs, and on top of its direct impact to sectors and companies, the collateral damage of the slowdown will be immense. 

“India faces a potential loss of $1 trillion,” says Barnik Chitran Maitra, lead author of the report and Managing Partner of Arthur D. Little for India and South Asia. “The threat to India’s most vulnerable in terms of lost livelihoods, poverty and hunger cannot be emphasised enough if there is a 10% contraction of GDP.”

The report by numbers

While India’s government has moved fast to counter the impact, announcing a fiscal stimulus to the tune of $22 billion, given the magnitude of the lost economic output and the impact on society, Arthur D. Little advocates for a far more assertive and wide reaching approach.

The report’s authors believe that investments should be ramped up to a massive $280 billion, which equates to around 10% of India’s GDP. This would bring India’s government stimulus package in line with the packages of several Western economies, including Germany, Italy, Japan, the UK and the US. 

“It is our belief that the cost of inaction is greater, with an anemic stimulus creating the risk of an economic tailspin from which India could take five to ten years to recover,” says Maitra.

A 10-point strategy

The $280 billion windfall to jumpstart the economy should according to Arthur D. Little be focused on ten areas: 

Strengthen the “safety net” significantly for the most vulnerable
The government could consider expanding the scale and duration of direct benefits for the poor by transferring an additional INR 15,000 to INR 18,000 per head to 300 million Indians under the Prime Minister’s Garib Kalyan Yojana (welfare-for-the-poor plan) and providing other forms of support such as universalising social security, increasing the monthly pension payout for senior citizens to INR 1,000 per month, and universalising healthcare. The total proposed outlay involved could be around $80 billion.

Enable survival of small and medium businesses
Provide direct assistance covering 70% of the payroll of small businesses, with a Small Business Corpus of $60 billion. The government could also consider deferring tax liabilities, including GST, for a period of six months. 

Restart the rural economy
Increase the maximum support price of critical crops, particularly priority cereals and pulses, and boost the funding and scope of the employment guarantee to all rural districts, with an increased budgetary outlay of $10 billion. This could be supported by a six month moratorium on agricultural loans, advance disbursal of fertilizer subsidies through direct benefit transfer and provision of special concessionary interest rate loans to farmers with a good credit history. 

Provide targeted assistance to at-risk sectors
The government should devise sector-specific “rescue and revival packages” structured as five- to eight-year convertible loans for several capital and labour-intensive sectors such as manufacturing, retail, hospitality, healthcare, travel and automotive, with a proposed outlay of $50 billion. 

Launch “Make in India 2.0” to capture global opportunities
With a focus on export-oriented industries such as pharmaceuticals, electronics, renewables, medical devices, food processing, electricals, precision components, heavy engineering, chemicals and textiles, a renewed push should be made to attract investments and improve the ease of doing business.

With the changing geopolitical environment, the government could explore opportunities of moving up the value chain in existing manufacturing (for example, active pharmaceutical ingredients) and prioritise technology-intensive manufacturing, supported by attractive financial incentives. The government could consider creating a $10 billion corpus for providing initial seed financing, capital and payroll subsidies, for select flagship investments.

Build “Modern India”
The creation of a $1 trillion infrastructure buildout fund is advised to create a modern India across several sectors such as smart cities, urban water supply and distribution, mining, oil and gas, logistics, cold chain and modern freight transport. Multilateral low-cost funding can be accessed from countries such as Japan, the US, the UK and the EU, and the government should consider seeding up to 5% ($50 billion) of the mega investment fund to kick-start these efforts.

The government can consider new measures to increase private participation in infrastructure projects by sharing risk equitably, proposing new Special Purpose Vehicle structures and simplifying dispute resolution and contract enforcement mechanisms. 

Accelerate Digital India and innovation
Arthur D. Little advises the government to catalyse a “Digital Team India” initiative along with leading global technology leaders and select local players to implement digital collaboration and cybersecurity solutions for Indian companies. The government should also catalyse the creation of an “India Cloud”, a digital alliance of data centres to host India-specific data locally and launch “Start-up India 2.0” to focus on new areas such as Artificial Intelligence, blockchain-based tracing and quantum computing. 

In addition to reducing compliance costs for start-ups and funding support from the Small Industries Development Bank of India, the government could consider becoming the anchor customer for start-ups of these nascent industries. Separately, the government could accelerate deployment of high-speed fibre-based broadband and accelerate India’s transition to 5G. The government should allocate $20 billion for funding these initiatives.

Strengthen global investment corridors
The government could capitalise on growing international efforts to diversify manufacturing bases and global supply chains by creating dedicated country-to-country or government-to-government investment vehicles.

The focus should be on working closely with international Sovereign Wealth Funds focused on creating priority manufacturing, infrastructure and technology assets for India and strategic international allies such as the US, UAE, Saudi Arabia, Japan and the UK. 

The Middle East also is an investment corridor that should be beefed up, says Thomas Kuruvilla, Managing Partner of Arthur D. Little Middle East. “India has a unique window of opportunity to take advantage of a geostrategic realignment of the world order and strengthen its global investment corridors, particularly with the Middle East.” 

Debottleneck land and labour
New laws and codes are needed to structurally reform the land and labour markets, to enable timely acquisition of non-agricultural land for manufacturing and infrastructure, while ensuring adequate compensation for landowners. The government could lay down a roadmap for labour reform, enabling businesses to manage their workforce in line with international norms. The simplification/consolidation of the over 40 labour codes into the proposed four laws could be prioritised and the proposed enactment of the Industrial Relations Code should be accelerated. 

Transform banking and financial markets
The authors propose the prioritisation of banking sector reform through further consolidation and massive recapitalisation (including from public equity markets). At the same time, the RBI could play an active role in bridging the financing crisis by expanding open market operations and stepping up “reverse sterilisation” to compensate for foreign outflows, and expanding the RBI balance sheet to support the government.

The government could consider amending the Fiscal Responsibility and Budget Management Act to allow for new metrics (debt-to-GDP ratio instead of fiscal deficit) and a relaxation of norms for the central government and the states. 

Maitra concludes: “The proposed programme is a way to invest in India’s future with immediate benefits of GDP stimulus, job loss prevention and poverty alleviation, and the long-term potential to recover 50% of the investment at reasonably attractive rates of return.”