As the government prepares to offer much-needed succour to lift growth, chief economic adviser (CEA) Arvind Subramanian on Saturday said the economy was facing challenges on multiple fronts and required a measured response “across the board”. “We have lots of challenges ahead… we have seen growth slowing down and investment not picking up. So, we have to attack this problem on many fronts — exchange rate, public investments while maintaining macroeconomic stability,” he said. India’s economic growth plunged to a 13-quarter low of 5.7% in the April-June quarter this fiscal, as the demonetisation-hit manufacturing sector received a further debilitating blow from pre-goods and services tax (GST) de-stocking by jittery businesses. An appreciating rupee hit export growth, while borrowing costs remain high for small and medium enterprises.
Subramanian didn’t specify the nature of a stimulus package the government is considering, but it’s speculated that the government is looking at stimulating demand through increased focus on exports, housing, rural infrastructure, power, railways and some other social sectors. Finance minister Arun Jaitley this week said the government will unveil “necessary” measures soon to stimulate growth. The latest slowdown is believed to be a combination of one-off factors of demonetisation and GST, plus the appreciation of currency. In the past two-three quarters, manufacturing imports have increased substantially—in sectors like gems and jewellery, electronics, textiles, chemicals and pharmaceuticals. These sectors have been affected by the appreciation of the rupee as well.
Thanks to the Reserve Bank of India’s heavy intervention to prevent the appreciation of rupee, and the strengthening of the Chinese yuan against the US dollar, the real competitiveness of the rupee has improved a little bit recently. “But it is still not enough to offset the loss of competitiveness in the previous six-nine months,” he added. Subramanian said all emerging economies face this problem, with a surge in capital inflow putting pressure on the exchange rate.
“All countries struggle with this challenge. Different countries take measures based on their trade-offs and objectives. What the RBI has been doing is to stem appreciation of the rupee,” he pointed out. The big appreciation in the rupee between January and April impacted both exports and imports. The RBI has been intervening in the forex market for the past three months. Amid heightened global volatility, the rupee on Friday recovered from its near six-month low and ended up a marginal 2 paise at 64.79 per dollar.
As for borrowing costs, the Volume II of the Economic Survey for 2016-17 also batted for softening interest rates by the RBI. It said India was possibly entering a phase of low inflation for the first time since 2005, aided by structural caps to price pressure in food and fuel. In a veiled criticism of the RBI, the survey had pointed out the central bank had overestimated inflation by more than 100 basis points in six of the past 14 quarters (three in 2014 and three in the most recent period) with an average error of 180 basis points.