The recent corporate rate tax cuts  have enthused the share market but are not sufficient to lift the growth rate to anywhere near the levels required for the $5 trillion economy goal. The reduction in the corporate tax will boost earnings but will not boost investment till corporates see clear signs of demand growth. 

An obvious measure to boost demand  for basic consumer goods is to pump money into the rural economy through higher spending on MGNREGA. If this means breaking the FRBM budget constraints, so be it.  The obsession with inflation control is misplaced in an economy where the more immediate threat is retarded growth and rising unemployment.  As for higher end consumer goods and capital goods,  relief will only come when growth and employment generation improve and the credit market is nursed back to health.

The Keynesian focus on immediate demand stimulation would be a good first step. But  we also need to correct the 5% fall in gross fixed investment since the 2011-12 peak. The bulk of this fall has been in the non-corporate sector.  Some of this fall could be because of demonetisation and the disruptions caused by GST. But the bulk of it is because our policy framework for agriculture and small industries, which account for nearly half the GDP,, has become obsolete and is not capable of drawing out the full growth potential of these sectors.

Our agricultural policy was designed in the mid-sixties when we faced severe shortages of food grains. The focus was on persuading farmers to use the 'green revolution' technology, mainly for wheat and rice, by providing an assured market with public procurement for these two cereals at generously set prices.  This policy approach is now no longer appropriate. In 1964-65, the year prior to the  mid-sixties  drought, our domestic production of rice and wheat was about 100 kg. per capita. In 2018-19 this has gone up to 160 kg. per capita and one sign of surplus production is the steady accumulation of wheat and rice stocks.

The mid-sixties focus on food security through strong incentives for wheat and rice production has lost its salience in today's agricultural environment. Wheat and rice account for less than a quarter of the value of crop production, which in turn is about two-thirds of total agricultural production. Add sugarcane, where the procurement by sugar mills often runs into liquidity and solvency bottlenecks, and the ten percent of milk production procured by cooperatives and the proportion of agricultural production that has a predictable price realisation and an organised procurement system amounts to about 21 per cent of the total.  Thus nearly 80 per cent of what our farmers produce is subject to market risks, exacerbated by laws that prevent farmers from choosing where to sell their produce. This lop-sided system distorts incentives, leads often to ecologically wrong crop choices and lands the government with an open-ended subsidy burden.

The focus of agricultural policy has to shift from selective crop or input oriented interventions to broad-based support that covers everything from field crops to horticultural products to animal husbandry.  Agricultural research and extension, market infrastructure development, agro-processing, storage, particularly cold storage, must focus on all crops and all regions.  This will stimulate both corporate and household investment in agriculture and agro-processing.

The big change however has to be the removal of all constraints on  where and to whom farmers can sell their produce. The competition among purchasers and more organised agro-processing may actually reduce the wild fluctuations in prices of products outside the official procurement system. This will allow a more predictable and stable agricultural trade policy instead of the current practice of panic reactions to seasonal surpluses and shortages. The need to subsidise agriculture will not disappear, if nothing else, because competitor countries will continue with their subsidies. But the basis can shift from distorting output and input subsidies to income support.

Micro, small and medium enterprises in manufacturing and services account for about 30% of GDP, employ 107 million in small micro enterprises and about 3 million in small and medium enterprises. They are split roughly a third each in manufacturing, trade and other services. The micro and small enterprises, particularly those in the trade sector were badly hit by demonetisation since much of their business was cash driven. Some months later they were hit by an inefficiently implemented GST. The immediate impact led to the closure of many units. Given the high share of these units in GDP, exports and employment the slowing down of consumption expenditure growth, export stagnation and the fall in household investment is quite understandable.

Many of our small industries thrived and survived on staying out of the tax net. With the GST this is proving to be difficult. Bringing them into the tax net is desirable and the focus should be on removing glitches. But the primary focus should be on a policy framework that does not encourage permanent smallness.

The small industry policy was based on a system of reservations that effectively discouraged them from growing larger. Many small entrepreneurs who were doing well retained the advantages of reservation by simply multiplying small factories, thus losing scale advantages in production.  The product reservations are now gone and yet there are other regulatory asymmetries in the Factory Act, the Shops and Establishment Act, Labour laws for instance that encourage small enterprises to remain small.

Laws to enforce standards must be made universally applicable except perhaps for a self-employed enterprise with no hired help. This will require some dilution of standards for large enterprises and a strengthening of standards for small enterprises. The distinction between the formal and informal sector must become history. In some ways GST is doing just that for, despite exemptions for enterprises with a turnover under Rs.20 lakhs, the availability of credits for GST paid is forcing even small players to register in the GST Network.

The removal of the small to large hurdle will allow the emergence of a size distribution of enterprises that makes economic sense, improve credit flow to small enterprises and thus stimulate non-corporate enterprise investment which is a large component of what we call household investment.  The revival of household savings and investment is the litmus test of whether we are on the road to recovery.

Export growth is vital for a high growth path and the stagnation since 2011-12 in the dollar value of exports makes this a particularly urgent policy imperative. A reformed and modernised policy for agriculture and for small enterprises, which account for about  45-50 percent of total exports, will help greatly. Of course it will require other more specific reforms in trade facilitation and an exchange rate policy that focuses on global competitiveness as its primary aim and is not distorted by large capital inflows.

In simple terms, we must look beyond large corporations and release the growth potential of our farmers and small entrepreneurs.