The cut in projection for the first half of the current financial year is starker – from 6.4-6.7 per cent to 5.8-6.6 per cent.
- By Charan Singh
Indian Economy has unfortunately been in a difficult situation for the last one year. The Reserve Bank has scaled down the growth forecast for 2019-2010 from 7 per cent to 6.9 per cent. The cut in projection for the first half of the current financial year is starker – from 6.4-6.7 per cent to 5.8-6.6 per cent. The consumer perception index recorded a substantial decline in July 2019 compared with its peak seen in March 2019. The situation is not promising, both globally and domestically.
Globally, the US, UK, Japan and the Euro area are facing a slowdown. The trade war between the US and China is adding to the uncertainty. The news from emerging economies such as Brazil, Russia, and South Africa is not promising either. Gold prices are rising while crude prices are declining. Globally, financial markets are reflecting weak sentiment.
Domestically, the rainfall is deficient and sown area under Kharif crop is lower than in the previous year. The IIP for June 2019 reveals a slowing trend mainly in manufacturing. The capital goods and consumer durables sectors recorded a negative growth during April-June, 2019 while intermediate goods and consumer non-durables recorded a high growth. Unfortunately, the demand is also shrinking. In rural areas sale of tractors and motor cycles has contracted, while in urban areas, sales of passenger cars and commercial vehicles have shrunk. Construction activity is suffering because of shrinking outputs of cement and steel.
Why worry about the Slowdown?
India is the fastest growing major economy of the world. India, a country with a population of 1.3 billion, adds about a million people to the workforce every month, and has the advantage of the demographic dividend with two thirds of the population is below 35 years of age.
The slowdown can lead to wastage of labour and capital available in the country. The country which has the potential to grow at 10 per cent annually is currently cruising at below 7 per cent. The consequences could be devastating apart from the lost opportunity to become an economic super power. The slowdown can obviously lead to unemployment, social unrest, and an increase in the crime rate.
The government is effectively using MGNREGA, but a social security measure is not an alternative to productive activity contributing to the GDP. It can also be argued that too much dependence on social security can be counter productive, if unemployment is structural and not frictional. Hence, there is a need for creating employment opportunities.
In the slowdown, given that nearly 30 per cent of our population is below the poverty line, many people are vulnerable in the face of adversities. This is true for the businesses in India too, especially in the unorganised sector. The mortality rate, therefore, is high, which can harm financial institutions.
How to stem the slowdown – Need for a multi-spectrum approach?
The slowdown in growth has been recognised by the government and the RBI. The remedial measures have to be rational, aiming not only at immediate recovery but also at confidence building and long-term sustainability of the initiatives.
First and foremost, the participation of private sector in nation building is very important in current economic situation. The Prime Minister’s interview published on August 12, 2019 is certainly aimed at generating confidence in the private sector. The government could consider establishing an India Growth Council (IGC) with the captains of Indian industry, chief ministers and officials as members. IGC could meet regularly, discuss issues as they emerge and inspire teamwork in expanding the country’s GDP.
NITI Aayog has been established as a think tank of the Union government replacing the erstwhile Planning Commission. However, there is no such institutional framework at the state level that corresponds to the vibrancy of the NITI Aayog. As India is a large country, a NITI-Grid, spread across the country to consider issues, undertake studies and conceive schemes of public policy, provide feedback on existing and prospective schemes would help in even distribution of growth and undertaking productive activities.
An important axiom of public finance is the simplicity of the tax regime. The GST regime is complex with multiple tax rates and slabs. There is a need to rationalise the GST rates and optimize them urgently. Illustratively, a simple rule, understandable in the remotest villages and computable without a calculator, and that would have 3 slabs – nil for uncooked food items; 10 per cent for all other items except luxury goods; and 20 per cent for luxury items.
The corporate tax rates need to be aligned with those in other countries, as an increasing number of multinationals operate in different international locations. This is especially true for companies in the automobile segment.
The country is passing through a critical phase with demand shrinking in both rural and urban areas. In such a situation, the government can consider pressing the pause button on clauses of FRBMA to invigorate demand. The relaxation of FRBM provisions would yield resources that can be used to finance infrastructure, temporarily enhance amount under MGNREGA, and probably provide a special support to housing and automobile sectors.
In India, interest rates are still higher, despite a repo rate cut on August 7, than that in China, and that impacts not only business activity and industrial output but also the export sector. Similarly, availability of financial resources in competing countries also need to be considered for our commerce and industry. The government has to consider, about the trade-off between unemployment and inflation. The government could consider either, temporarily, raising the inflation target assigned to the RBI, or instructing the RBI to pause inflation targeting and pursue, singularly employment and growth, in a focused manner.
It’s time for the Narendra Modi government to take bold decisions. India will need steps similar to those taken by the US and the Euro zone counties after the global meltdown in 2008.
(The author is CEO of Noida-based economic think tank EGROW Foundation. The views expressed are the author’s own.)