The RBI had revised the growth rates downwards from 6.1 percent to 5 percent for 2019-20 on Dec 5, 2019.
By Charan Singh
The RBI had revised the growth rates downwards from 6.1 percent to 5 percent for 2019-20 on Dec 5, 2019. And now, the IMF’s Chief Economist has observed that IMF will be substantially revising downwards the growth rate of the economy. Earlier, GDP data released by the Government on Nov 29 for April to September of 2019, revealed that the growth rate had declined to 4.8 percent from 7.5 percent during a similar period in 2018. Interestingly, growth in construction activity declined from 9.1 percent in April – September 2018 to 4.6 percent during similar six months in 2019. Private consumption expenditure from April to September 2019, as a ratio of GDP, is lower than that in similar six months in 2018, while Government consumption expenditure is higher. The performance of core industries was also not encouraging during April – October 2019, with the production of fertilizers, steel and electricity increasing while coal, crude oil, natural gas, refinery products, and cement recorded negative growth.
The Union Government announced various measures to revive growth like reducing corporate tax rates to 22 percent for existing and 15 percent for new domestic manufacturing companies, mergers of banks to improve the health of banking sector, infused Rs.70,000 crore in banks to recapitalize them, announced investment in new infrastructure projects, and strategic disinvestment in important public sector enterprises.
Most importantly, the slowdown in India should be contextualized in the global slowdown. The global economy, and so would Indian economy, also suffer from a significant slowdown in face of trade–war between the USA and China, where growth in other countries can significantly suffer through spillovers and contagion; uncertainty about how Brexit would happen, given the results of latest elections in the UK; ageing demographics in advanced countries impacting demand; country-specific conditions in many advanced countries, and other geopolitical tensions. The growth estimates for the global economy have also been scaled down to 3 percent in 2019, slowest since the global financial crisis of 2008. The growth rate of the world economy was 5.5 percent in 2006 and is projected at 3.6 percent for 2024. Thus, India has to prepare accordingly.
How to raise the growth Rates: Some Suggestions
In India, given the young demographics, and the fact that about a million people join the workforce every month, the Government could consider more fiscal expansion, given the current economic slowdown. The sanctity of 3 percent of gross fiscal deficit (GFD) as a percentage of GDP is not important during difficult economic conditions. Even in the USA and the UK, this figure was ignored after the great financial recession. Similarly, debt to GDP ratio exceeded 60 percent of GDP in most of the OECD countries since 2008. India’s debt to GDP ratio, around 47 percent, is amongst the lowest in the world, for non-commodity rich/exporting countries, implying that there is some fiscal space available. Hence, a pause on the Fiscal Responsibility and Budget Management Act can be defended.
It is interesting to note, in this endeavor to revive the economy, state governments have not been similarly participating in initiating measures to increase employment, provide tax concessions, and incentivize investment in their respective states. The GFD of states as well as debt to State GDP ratios is reasonably low if examined against a decadal trend. Therefore, the expansionary fiscal policy of the states can also help in generating demand in the economy.
Similarly, large Municipal Corporations like that of major cities can also participate in generating demand by more effective expenditure management at the local level. Interestingly, pump-priming at the local level has not been considered in India, so far.
Reserve Bank of India has been actively lowering the policy rate but probably will have to do more heavy-duty work. An accommodative monetary policy can help sustain and revive growth impulse. The rising inflation, mainly because of food prices, probably constrained the RBI to not lower the rates on December 5, 2019, given the mandate from the Government to follow inflation target of 4 percent, as measured by the consumer price index. In view of the demographic pressure on India, it may be necessary to recognize the short-term trade-off relationship between unemployment and inflation. In trying to control inflation at the cost of neglecting unemployment may not be a prudent social objective. The unemployed youth, especially frustrated graduate, is more vulnerable to anti-social activities and hence the need to focus on generating employment. Therefore, in a young demographic country like India, a need for a pause on inflation targeting for a few years can be explained.
The Government could consider, given the complexity of the continent-size Indian economy, with various sub-economies within it, constituting a group of macroeconomists to diagnose, examine and recommend, policy initiatives that can help the economy to grow faster than 9 percent, its potential growth rate, despite the global slowdown. The domestic economy is vast with untapped hinterland having substantial purchasing power, normally reflected in crowded shopping malls and airport lounges. The inward-looking policy, with a focus on the rural and agriculture sector, MSMEs, village and cottage industry, can probably help to revive the growth rate.
In view of the dismal growth in manufacturing and construction, despite a booming stock market, it can be construed that the private sector is not participating in the growth initiative. The addition of nearly a crore people in the workforce, annually, would imply the need for a massive job creation exercise that cannot be completed without the active participation of the private sector. Therefore, the Government may like to initiate a dialogue with the private sector.
To conclude, there are green shoots in the economy. The healthy tax collection under GST for the month of November 2019 clearly shows that the economy is vibrant. The Government initiatives of August and September 2019, with some gestation period, should start showing results in the second half of the year, containing many festivals, which hopefully will also lead to buoyant sentiments.
The policy initiatives and measures need to be classified into short term and medium term to navigate the economy through difficult times. To successfully implement the policies to result in effective outcomes, state governments, and the private sector will have to synchronize their strategy and reinforce synergies with the central Government.
(The author is CEO, Foundation for Economic Growth and Welfare. The views expressed are the author’s own)