Have demonetisation & GST pushed India’s economy into a downward spiral? No, say economists. But, is the economy doing great? No again, say economists! Senior BJP leader and former FM Yashwant Sinha, writing in the Indian Express, has raised several red flags. His son, and a minister in the Modi government, Jayant Sinha has a different tale to tell. According to Sinha junior, India is developing a ‘new economy for a new India’. In a column in TOI – seen as a counter to his father’s views – Jayant Sinha talks about structural reforms that will allow most people access to affordable housing, electricity, bank accounts, toilets etc.
India’s GDP growth for the first quarter of the current financial year hit an all-time low of 5.7%. The number rang alarm bells, as it rightly should. Even as talks of a fiscal stimulus do the rounds, PM Narendra Modi has constituted an Economic Advisory Council to advise him on macroeconomic issues. But, what is the actual economic picture?
GDP slowdown – worst is over
Dr Arun Singh, Lead Economist at Dun & Bradstreet India is of the view that India’s economic slowdown has bottomed out. “The back-to-back structural and disruptive reforms – demonetisation and GST – while will have long term positive impact – have hit GDP, causing uncertainty and in particular hitting the cash dependent informal economy. This cash dependent informal economy has also been forced to now come under the tax ambit, given GST implementation. This is bound to cause short-term pain,” Arun Singh tells FE Online. “In the 10 quarters before demonetisation, the average share of investment in the incremental GDP was more than 30%. Since then, averaging over the last three quarters, the share is as low as 2%. This reflects a readjustment of the economy. The pain is expected to continue for the next few months as well,” he believes.
However, from FY19 onwards, Singh sees steady economic recovery on the investment front as well. “The consumption story should see a revival from the festive season itself. Fundamentally, India remains on the growth path and in FY19, I believe that GDP growth should hit more than 7.5% mark,” he says.
In recent reports, CRISIL and Franklin Templeton Investments both opined that the sharp decline in growth during the first quarter is transitory.
Reality check for Modi government
Even as economists and research houses are confident that the slowdown is transient, some point to structural issues that need to be addressed. Sachchidanand Shukla, Chief Economist at Mahindra & Mahindra says, “The biggest worry right now, without getting into structural or cyclical issues, is that the low GDP growth number has hit business and investment sentiment and brought in an element of uncertainty.” According to Shukla, the first thing that needs to be done is acknowledge that a problem exists. “Once you do that, you have to accelerate structural reforms such as resolving NPA crisis and speeding up infrastructure projects. India needs a combination of fiscal and monetary stimulus,” he tells FE Online.
“On the fiscal front, the quantity and quality of spending both matter. So, if you fore-go 50 basis points from the fiscal deficit target and invest it in creating infrastructure, it makes sense. The multiplier effect of spending on a sector like infrastructure is above 2,” Shukla elaborates. “Growth may have bottomed out, but the government needs to get its act together if it is hopeful of a sustained economic recovery,” he concludes.
Agrees Suvodeep Rakshit, Vice-President and Senior Economist at Kotak Institutional Equities who calls for a calibrated approach. “There are structural issues that ail the economy. For example, private sector investment is very low and will take time to pick up. Any fiscal stimulus to spur short-term consumption would be futile,” Rakshit tells FE Online. “India needs long-term structural steps such as job creation and focus on hard and soft infrastructure. We need to focus on healthcare and education. Also, MSMEs have been hit hard by the rollout of GST, so that’s an area that the government should immediately address,” he prescribes.
Notwithstanding the political slugfest, experts concur that the low GDP growth number has psychologically hit sentiment, but there is also a consensus that underlying problems persist in the economy – and solutions exist! Focus on reviving business and investor sentiment and stepping up focused infrastructure spending appear key to India’s recovery. The underlying prescription of experts to PM Modi is what former PM Manmohan Singh wanted in UPA2 – the need to unleash animal spirits!