A balance between fiscal prudence and investment-driven growth is needed

With the slowdown in the economy, unemployment is going to turn its ugly head once again, even though this has been one of the key pressing issues during the 2019 election campaign.

GDP growth,  GDP, unemployment, unemployment rate, International Labour Organisation, NBFC sector, GST, PSU banks, e-NAM, welfare schemes
The recent NSO report adequately corroborates this by stating that the unemployment rate is currently above 6%.

Among a variety of challenges that the newly-formed government at the Centre can envisage, the economic challenge is possibly going to be at the centre stage for quite some time. Witnessing a slowdown in the economy in terms of experiencing reduction in GDP growth from 8.1% in March FY18 to 5.8% in March FY 2019 indicates that the economy is genuinely not in good shape, and the government has a tough job at hand. It is precisely because GDP is connected to productivity, and productivity is overwhelmingly connected to participation of human labour and engagement. With the slowdown in the economy, unemployment is going to turn its ugly head once again, even though this has been one of the key pressing issues during the 2019 election campaign.

The recent NSO report adequately corroborates this by stating that the unemployment rate is currently above 6%. Data suggest that half the youth in India are aged 25, of which 19 million are expected to be jobless by the end of 2019, according to a 2018 report by the International Labour Organisation (ILO). Challenges are, therefore, humongous, and the government needs to engage itself in serious introspection; it must also set up a willing competent taskforce to address the issues at the ground level.

Already reeling under consumption slowdown, liquidity crisis in the non-banking financial company (NBFC) sector, fall in exports and lower terms of trade in the agricultural sector, optimism around India’s economic growth has taken some beating. With the GST not living up to expectations and fiscal expenditure rising amid compelling priorities, the economic growth seems difficult to accelerate.

Weaker consumer demand and slower growth in investments were blamed for the slowdown in India’s economy. Consumption constituted about 60% of GDP (at current prices) during 2017-18 and 2018-19. A decline in consumption indicates that the demand has dried up and needs to be revived immediately. It is in this context that raising the income of the bottom quintile of population assumes significance. This could be achieved through direct income transfers and a host of other income support mechanisms that need to be worked out through wider deliberations and consultations. Secondly, investment, which is another major driver of economic growth, also witnessed a bumpy ride. Private investment grew 7.2% in the March quarter, down from 8.4% in the previous quarter, while investment growth slowed to 3.6% from 10.6%. The slowdown would put pressure on for fiscal stimulus, including tax cuts on fuel products to boost consumption.

The farm sector contracted 0.1% in the March quarter, compared with 2.7% growth in the previous quarter, while manufacturing grew 3.1%, slower than 6.7% in the previous quarter. Several indicators such as automobile sales, rail freight, petroleum product consumption, domestic air traffic and imports are indicating a slowdown in domestic consumption. Corporate earnings hit a six-quarter low growth rate of 10.7% during January-March 2019 on weakening consumer sentiment and softening commodity prices. Stress in the NBFC sector has largely affected consumption finance. Weak rural activities have also been impeding growth recovery. Low rural wages, slowdown in credit from low to medium scale industries, and weak demand in two-wheeler and commercial vehicle sales have also contributed to low economic activity and thus economic growth.

Unlike during the first five years of this government, the solution to the problems this time around is complex and requires a radical shift in economic policy. If the first term of the government was dominated by housing, roads, skill India, digital India and toilets, the second term would have to be dominated by investment, jobs and resurrection of the dislocated financial sector. Among immediate priorities, one would expect the second term of this government should focus on measures to revive consumption, address financial sector dislocation by recapitalising PSU banks, boost the manufacturing sector to ensure job creation, and address the issue of skill shortage in the country to ensure employability.

Likewise, on the rural front, where farm distress has been acute and is threatening farmers’ productivity and livelihood, the government should sincerely attempt to revive terms of trade in agriculture. The government must strengthen e-NAM, enhance micro-irrigation facilities, increase credit to agriculture and boost farm prices through effective implementation of some relevant schemes. Not just welfare schemes, but the government now has to adopt a balancing act between development and consolidation.

The government needs to ensure that it maintains a balance between fiscal prudence and investment-driven growth; an imbalance could either lead to a slowdown or rise in inflation. It is possible for the government to go for an option such as to increase investments to provide a temporary boost, but it has to proceed with extreme caution especially as direct tax collections—a key source of investment—have not been satisfactory during the year.

Now all eyes will be on the new Union finance minister Nirmala Sitharaman, who has to implement quick measures to balance growth and consolidation—a key blend to achieving double-digit growth in the future.

The author is Professor, LBSIM, and former senior faculty, IIFT, Delhi

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