The govt has taken a few decisions that should Aid growth. Now, it must work ON RATIONALISING GST rate
The release of the first quarter GDP growth estimate at 5% is the lowest seen in the last six years. The trend shows that the secular deceleration has continued from 8% in the first quarter of last year. Describing the trend as disappointing is an understatement; it is actually worrisome. We cannot afford to be in the denial mode any longer, and business as usual will worsen the situation. Nor is it going to help us to claim that the slowdown is cyclical and a global phenomenon. While there is no denying the fact that cyclical factors have not helped matters, there are serious structural factors that need correctives. While aspirational goals, like achieving a $5 trillion economy by 2024, sound well, the road to achieving them is paved with hard rocks. It is said, “crisis is the mother of reforms”, and hopefully, the government, with its overwhelming mandate, will wake up to undertake serious structural reforms.
Notably, the first quarter GDP growth estimate of 5%, and GVA estimate of 4.9% cast serious doubts on the economy’s ability to grow at the projected 7% in the Economic Survey and 6.9% projected by the Monetary Policy Committee of RBI for the whole of FY20. In fact, RBI’s estimate of 6.9% hinged on growth in the first half of the year being in the range of 5.8-6.6%, and that in the second half being in the range of 7.3-7.5%. Now, these look like a distant dream. We have not had any better news in the two months of the second quarter on the domestic and exports fronts either, and the growth is unlikely to see much acceleration. With the growth in the first quarter plunging to 5%, and with no revival in sight, we may, at best, hope for the economy to grow at 5.5-6% in FY20 if significant structural reforms are carried through without much loss of time.
The sectoral break-up of the growth rates shows that except public administration, electricity, gas and water supply, and mining and quarrying, all other sectors have seen moderation in varying degrees. In fact, the manufacturing sector growth plummeted from 12.1% in the first quarter of last year to 0.6%. In the previous quarter, the growth was 3.1%. Such poor manufacturing growth has not been seen for a long time. Curiously, the manufacturing sector growth, even at current prices, is 2%, which shows that price increase was just 1.4% over the year! Another sector where the slowdown is pronounced is construction. It has moderated from 9.6% in the first quarter of last year to 7.1% in the previous quarter, and further to 5.7% in the first quarter of FY20.
The growth of financial, real estate and professional services sectors at 5.9%, too, shows moderation, particularly when compared to the growth of 9.5% in the previous quarter. The growth of public administration and defence in the first quarter of the current year at 8.5% was higher than in the corresponding quarter last year by one percentage point. On the expenditure side, much of the slowdown has happened in private consumer expenditure and gross domestic capital formation. The government expenditure has actually shown a marginal increase both at current and constant prices, and exports have maintained a constant share in GDP.
The disappointing growth estimate is clearly a wake-up call to fast track the reform process because the slowdown is much more than what is claimed as cyclical. Structural reforms have to be immediately unleashed. In the last couple of weeks, the government has taken some decisions which are helpful, such as scrapping the angel tax on start-ups, faster GST refunds to MSMEs, opening up some more sectors, such as single-brand retail and coal mining, for FDI, and allowing replacement of old cars. More importantly, the finance minister announced the merger and consolidation of 10 public sector banks into four large banks, and their recapitalisation to take them to global scale in the hope that they will be too big to fail, and that this will help in reaping scale economies by rationalising branch spread, and result in productivity gains.
There have also been some governance reforms entrusting greater responsibility to the banks’ Boards and permitting market remuneration to risk officers. Although customers may not see much disruption, the governance of the banks will take time to adjust to the consolidation process and, hopefully, this will not constrain lending. Market remuneration to risk officers alone is not likely to fly unless the entire structure of the banks’ top executives is looked into. Much more reform in the governance of PSBs is required, particularly to distance government from making decisions regarding PSUs on the lines recommended by the Nayak Committee. The reaction of the large number of employees involved in this massive reorganisation exercise, too, remains to be seen.
The problem is serious and much remains to be done. An important reason for the moderation in private consumption and capital formation, and decline in the growth of manufacturing, real estate and trade hotels is the high rate of GST. It may be noted that 28% tax on automobiles, consumer durables like refrigerators and air-conditioners, motor cars and their parts, and construction materials like cement and its products, marbles and paint, sanitary fittings, as well as those impacting tourism have had their impact on compressing demand. The FM should insist that the GST Council prune this list and, if this is done, expansion in the demand for these items could substantially offset the loss of revenue. This will also help simplify the structure of GST. It is also important to ensure that the GSTN places the technology platform on a firmer footing so that matching of input tax credit can be carried out systematically.
The government has already taken the decision to activate strategic disinvestment and, hopefully, this should be carried out on war footing to generate resources to stimulate public spending. Rationalisation of GST is only a short term measure. The time now is opportune to undertake major structural reforms in factor markets. Perhaps, the government should think of moving over to the negative list instead of continuing with the positive list for permitting FDI. It is known that the rupee is overvalued and RBI should move to peg it at a realistic level to promote exports. Hopefully, the coming weeks will see a flurry of activity on the reforms front, to reverse the trend of the slowing economy.
(The author is Chief economic advisor, Brickwork Ratings and Counsellor, Takshashila Institution. Views are personal)