By TN Ashok
Why has the economy slowed down and what does government want to do right now : Demonetisation of old Rs 500 and RS1000 notes, which constituted 86% of the currency in circulation, had crippled cash-dependent informal/unorganised sectors of the economy and small enterprises.Government’s prime focus is to target government spending within the limited fiscal space available, particularly on infrastructure, and then quickly fix GST problems focusing on sectors and industries that create jobs. The biggest challenge before the government today is job creation as the country is flooded with educated youth who are engineers, scientists, doctors, IT professionals – the brain bank of the country – but no jobs to make them productive. Reasons are not far to seek.
Banks are not dropping lending rates for industry, industry does not want to invest and adopts a wait and watch policy holding onto its cash cache and refraining from any external commercial borrowings, all resulting in dealing a death blow to the manufacturing sector at a time when Modi wanted to see growth in this sector with his Make in India campaign.
The government is concerned about the stuttering growth despite a benign macro economic environment, with easy money flowing in, global growth reviving, government revenues looking solid, deep foreign exchange reserves, reasonable oil prices and a decent monsoon keeping food prices in check, economists are quoted by media as saying.
Besides the falling GDP growth rate, exports are facing strong headwinds and the industrial growth is the lowest in five years. The current account deficit (CAD)—the difference between inflow and outflow of foreign exchange—has risen to 2.4% of the GDP in April-June. CEA Arvind Subramanian had last week briefed Modi on the macroeconomic situation. Finance Minister Arun Jaitley will undertake a high-level review of the economy to discuss measures, including a possible stimulus package, to be taken amidst an economic slowdown. Commerce minister Suresh Prabhu, NITI Ayog vice chairman Rajiv Kumar and secretaries in the finance ministry — Ashok Lavasa, Subhash Chandra Garg, Hasmukh Adhia, Rajiv Kumar and Neeraj Kumar Gupta — are expected to brainstorm on the slow down.
At the end of the day, India on which foreign investors were betting on as the best place to invest after China, were holding on to their currency chests, government was holding the reins on public expenditure to rein in fiscal deficit , banks despite extraordinary war chests of currencies not willing to drop lending rates , manufacturing sector not willing to take any risk with further investments , all contributing to a vicious cycle of a monetary crisis that led to slow growth.
Only way to boost growth is for people to open up and invest and kick start the economy taking a calculated risk that’s not tantamount to gambling but a definite step forward to recover the economy that’s sagging now and in the pits. As former FM Chidambaram used to say Consumption leads to growth – to bolster consumption , BJP needs incentivise industry to resume manufacturing and invest.
Prime Minister Narendra Modi postponed his Tuesday meeting review of the economy with top officials of the finance and commerce ministry for obvious reasons. The facts were not yet ripe for a review. One of the main reasons for this is the Indian Meteorological Department’s prediction of the how the south west monsoon is going to end. After years of good monsoon, the SW monsoon has been slowing down, probably due to the El Nino effect with the equatorial currents heating up, since the last few years. Parts of India have been parched. Agricultural productivity is an important factor to take into account while calculating the nation’s GDP growth.
The SW monsoon got off to a spectacular start in June starting from Kerala but after the cyclone tapered off, it slumped leaving many parts of north India parched and dry , especially Maharashtra, and Uttar Pradesh. The IMD is yet to make a full assessment of the monsoon effect before the next monsoon. The North East monsoon sets in over southern India from October to December. The sowing and reaping seasons of both the summer Rabi and Kharif crops are at stake affecting the lives of millions of farmers in the country.
So, the Chief Economic Advisor Dr Arvind Subramaniam wants to factor this into account before wrapping up his presentation to the Prime Minister and Finance Minister and top officials of the finance department on the growth prospects for the remaining quarters of FY 2017-18 , that is September to November that constitutes the 2nd quarter, October to December the 3rd quarter and Jan to March the final 4th quarter. Right now concern is over the 2nd quarter.
Will the slowdown in the economy in the first quarter of FY 2017-18, April to June recorded at one of the lowest since 2014, when Modi came to power, at 5.7 %, against the then 7.9%, continued unabated or will it taper off? This is the big question. The predictions within the RBI and rating agencies are residual effects of demonetisation and settle down effects of GST will continue to haunt the economy well into the 2nd and 3rdquarters, though gradually receding month by month. Industry is happy with the GST because they get input returns on raw materials, but traders are very unhappy, and small economy is frustrated. Services sector is still in shell- shocked by the GST.
GST is a worldwide phenomenon and no one can question its introduction as Modi government is only trying to adopt best practices of modern trading and economics to integrate with the global economy. The fault may be in the classification of goods in various categories which is hitting people most. Even in the United States, the highest GST rate is only 17%. Government probably needs to take a second look at the classification of the 5-tier rates: 2%, 5%, 12%, 18, %, 28% and reclassify the commodities to fit them into different brackets.
The government is seriously concerned about the slowdown in the economy to its lowest in the last 10 years to 5.7% and perplexed because foreign exchange inflow is at its peak, 32billion USD record flow last month, total foreign exchange reserves at a record near 400 $ USD billion, banks are flushed with money after the demonetisation nearly 1.7 trillion notes have come back into the system, terror funding has been dealt a blow, black money has come out, albeit even if it’s in trickles, unproductive money storied in rice bins have come back into the system.
Then why the slow down? It’s the mindset of the both the lender and loaners. Global recession is still not tapering off. Chinese economy is still overheated with piled up inventories. Europe is still struggling with the Greek crisis. US economy has picked up but the new dispensation does not give the same most favoured nation treatment to China and is seeking newer alliances with Japan and India to counter Chinese-Pakistan-North Korea axis for security reasons. China has a massive inventory of steel lying in godowns as there is no pick up from the west.
It’s against this background that Modi called the review meeting on how best India should realign itself with the world trade.
Only two years ago, India outpaced a slowing China with its fast rising GDP growth. But the happy trend soon gave place to gloom as since 2016, the GDP growth has declined for six consecutive quarters, dipping to three-year low of 5.7% in the April-June quarter, with India losing the fastest-growing economy tag to China for the second straight quarter. “Government is keen to address structural problems facing the economy as well as transient issues with the implementation of the goods and services tax (GST), government sources said.
GST was to boost growth by 2 percentage points but technical glitches in the first two months of implementation created a scare of revenues falling way short of expectations. Sources say the two issues the PMO wants fixed quickly are sluggish exports and slow growth of private investments. Traders were exhausting their inventories to avoid paying GST.
(T N Ashok is a Corporate Consultant, Resident Editor and Writer on Economic Affairs).