Declining growth: time to pause and take corrective action

Politics aside, former Finance Minister Yashwant Sinha’s controversial article in the Indian Express has raised some valid concerns about the slowing growth which ought to be addressed by the government, especially those who are responsible for the management of the economy. The government’s rejoinder through an article by his son Jayant Sinha that everything is hunky dory and the spate initiatives like demonetization and Goods and Services Tax (GST) will benefit economy and the people in the long run will not cut ice with those reeling under the impact of slowdown.

The better course would be to pause, reassess the situation and take corrective action. Without going into politics of accusation and counter accusations, the government must face the fact that growth rate is declining. This has also been pointed out by several secular experts. More recently, Asian Development Bank (ADB) slashed India’s GDP growth forecast for the current fiscal to 7 per cent from 7.4 per cent owing to weaknesses in private consumption, manufacturing output and business investment. The 7 per cent GDP growth expected in 2017-18 is lower than 7.1 per cent recorded in 2016-17 and its earlier projection of 7.4 per cent in July.

The ADB had projected 7.4 per cent growth for 2018-19, down from the earlier forecast of 7.6 per cent in July. On the other hand, the ADB raised its forecast for Chinese economic growth to 6.7 per cent in 2017 from 6.5 per cent and upped its estimate for 2018 to 6.4 per cent from 6.2 per cent. India’s growth fell to a 3-year low of 5.7 per cent in the April-June quarter of 2017-18 “due to lingering effects from demonetisation and transitory challenges related to the new GST regime”, it had said. “Weakness in private consumption, manufacturing output, and business investment has resulted in lowering the short-term growth outlook for the country,” it added.

On the June quarter dip in expansion, it said growth in private consumption and industry declined compared to previous quarters. Fixed capital formation grew by a sluggish 1.6 per cent, indicating a sharp slowdown in private investment. “Investment growth, however, is likely to remain muted in 2017-18 as budgetary constraints limit government expenditure. Growth will further pick up in 2018-19 as the new tax regime improves domestic competitiveness and government efforts to improve health of the banking sector aid private investment to yield results,” the bank said. Inflation, on the other hand, is expected to average 4 per cent in the current year and 4.6 per cent in the next, significantly lower than the previous estimates of 5.2 per cent and 5.4 per cent, respectively. On the positive side, the report underlined the commitment by Indian policymakers to meet the fiscal deficit target in 2017-18, despite the presence of some risks in the form of lower non-tax revenue and a slow start to the disinvestment of public sector enterprises.

Tax collections are likely to gather speed as firms adjust to the new tax regime, it said. “Strong global growth and an improved business climate will help India’s exports grow at a faster pace in 2017-18 and 2018-19. Efforts to improve domestic demand will also spur import growth as private investment picks up, thereby widening the current account deficit compared to the past couple of years,” it added. ADB noted that government efforts to liberalise foreign ownership caps across sectors and foster a friendly investment climate will help attract stable foreign direct investment flows and comfortably finance the current account deficit.

Besides ADB, the India Ratings also lowered the country’s growth forecast for the current fiscal to 6.7 per cent from 7.4 per cent estimated earlier, citing ‘disruption in economy’ on account of demonetisation and GST implementation. The rating agency said the failure to quickly remonetise the economy proved fatal for the small and unorganized sector which were heavily dependent on cash. “The combined effect of demonetisation and introduction of goods and services tax (GST) is proving to be more disruptive for the economy than was expected earlier. It is unlikely to meet the agency’s earlier projection of 7.4 per cent and will come down to 6.7 per cent during 2017-18,” the rating agency said. Without getting into the objective of demonetisation, Ind-Ra said, “Sucking out the high denomination currency while failing to remonetise the economy quickly has in many cases proved fatal for the unorganised sector/small and medium enterprise where business transactions are heavily cash dependent.”

Citing reports that the union government is planning a stimulus package, the rating agency said that the availability of fiscal space with the government is questionable. The ADB expects the RBI to go for another round of rate cut in the latter part of 2017-18 in view of sluggish economic activities but does not see possibility of any major fiscal stimulus. The Monetary Policy Committee of the Reserve Bank reduced the key interest rate (repo) by 25 basis points to 6 per cent in August. The committee is scheduled to come out with next bi-monthly monetary policy decision on October 4. “With inflation within the central bank target range of 2–6 per cent and economic activity weakening in January–June 2017, the latter part of the fiscal year offers some scope for additional monetary easing,” ADB said in a report. ADB said fiscal stimulus “is less likely with the government having exhausted 92.4 per cent of the full fiscal year deficit to cover slippage in non-tax revenue due to slow progress in achieving disinvestment targets”.

As per the updated report, India’s inflation is expected to average 4 per cent in 2017-18, significantly lower than the April forecast. Higher global food and fuel prices and improved aggregate demand are likely to push inflation to 4.6 per cent in 2018-19, though still below the earlier forecast, it said.

Yashwant Sinha in his article expressed concern about efficacy of demonetization and tardy implementation of the GST. It’s unfortunate that the government’s representatives opted for the easier path of rebutting the criticism politically rather than admitting the existence of a serious problem and contemplating corrective action. The right course would be to listen to the independent-minded economists, formulate a credible action plan and work towards reviving the economy as mudslinging will neither help the government nor the ruling party or its vote bank.

Leave a Reply