By S Sethuraman
It is now universally recorded that the Indian economy has taken a beating from the abrupt ill-planned demonetisation of November 2016, compounded by the hasty launching of GST, posing new challenges to business, trade and services.
Caution underlies the revised downward projections for India’s growth to well below 7 per cent, in most institutional forecasts, for fiscal 2018.
All this may be unpalatable to our Finance Minister Mr Arun Jaitley, who has perfected the art of brazening out of every awkward situation for the Modi Government. But in the face of mounting criticism at home and abroad of policies which have slowed down growth, and with telling data, the Prime Minister himself seems to realise that the ground under his feet is no longer as hardy as it seemed thus far.
And Mr Jaitley also conceded at last that “policies and investment” have to be looked into. There is growing view, even globally, that the world has had enough of “hyper-globalisation” and austerity regimes, which had slowed wage growth and widened income disparities. Opinion has gathered momentum that countries would now need to ease fiscal policies and ensure that public spending goes for “growth-inclusiveness” and long-run supply build-up..
At the global level, growth has gained momentum since the second half of 2016 and is now projected to rise from 3.1 per cent in 2016 to 3,5 per cent in 2017 and to 3.7 per cent in 2018. While China continues to be the main global growth engine, India’s share has slackened. Indeed, OECD estimates China’s growth in 2017 at 6.8 per cent (from 6.7 per cent last year) to be above India’s 6.7 cent this year.
Even as the Finance Ministry launched its routine budgetary exercises for the next February budget 2018/19, Mr Jaitley has had to summon colleagues of key economic ministries and consider what kind of package of measures could begin to make a difference to get out of the current slump to ensure that India’s aborted growth is restored to a sustainable level of 7 to 8 per cent. The Prime Minister now awaits a tough package to stimulate the economy without India straying off the fiscal consolidation course.
According to OECD, the latest to come out with its Interim economic Outlook for 2017, while there are “positive surprises” in China and Russia, among major emerging econ0mies, India’s growth projection has been revised down to 6.7 per cent in 2017 due to “transitory factors”. (Demonetisation, GST). UNCTAD in its Trade and Development Report has also projected 6.7 per cent in 2017 (as against 7 per cent earlier) listing demonetisation, GST and corporate deleveraging as factors slowing down the economy and making recovery difficult.
It is going to be quite challenging for the Finance Minister to evolve a set of urgent measures, without having to wait for another four months in the budget preparation, which would invoke a revival of business investment and stimulate demand in the economy. His tentative proposals to arrest the growth decline and reset the economy on a course of sustained recovery may involve selective tax cuts and withdrawal of some of the higher GST rates and cesses, for both goods and services.
The outcome of his ongoing consultations with colleagues dealing with trade (which has a significant share in overall growth), railways and other infrastructure and the Chief Economic Adviser would be presented to the Prime Minister who would be briefed in detail on the implications of what in short may be taken as a fiscal boost to a sagging economy as well as its implications in terms of safeguarding fiscal rectitude..
Whether it would also be job-creating would depend on the nature of the fund injections and programmes to be financed. But the economy as a whole and its structural problems had not commanded the Prime Minister’s attention as much as needed over the last three years. Otherwise, India would not have come down to this slowdown syndrome and jobless growth. His Government needs to do more self-introspection so that whatever has gone wrong gets rectified.
The research studies brought out by RBI and SBI (State Bank of India) have veered towards the imperative of greater public spending on both infrastructure as well as growth-inclusive programmes.. UNCTAD report has called for a global deal for coordinated expansion of economies led by increased public expenditure which would generate employment and crowd in private investment as well.
RBI itself had cautioned in its annual report that the transitory factors that brought down GVA to 5.6 per cent in the first quarter of current fiscal year are not allowed to get entrenched. Though the first quarter slowdown is in part attributed to GST challenges, OECD says in the long run, GST is expected to boost investment, productivity and growth.
India’s growth has been steadily declining from a peak of 7.9 per cent in the first quarter of 2016/17. The SBI report takes a grim view of the prospects unless Government intervened “to use fiscal policy as a tool to rev up the economy”
Although the economic upturn is more synchronised across countries with expanding investment and trade, OECD says, growth in emerging market economies will depend on deeper reforms. China has stepped up its public infrastructure investment. In India, while Government says it is investing more on infrastructure, business investment has remained weak and possibly because of lack of structural reforms which the Modi Government has deferred for the present.
OECD says India should give priority to public spending that yields “higher benefits for growth inclusiveness and long-run supply” such as in areas like education, hard and soft infrastructure, family benefits and health investments. With inflation rising (both food and fuel), as indicative from CPI and WPI data over the last two months, and CPI expected to be in the range of 3.5 to 4.5 per cent in the second half of current fiscal year, further monetary easing seems ruled out at the October meeting of the Monetary Policy Committee chaired by RBI.
(IPA Service)