A small dip due to was expected. But with demonetisation, economy slowed down more
Despite naysayers, India’s economy is not in doldrums. Growth, while a lot slower than expected, is still at a decent 5.7 per cent. But there is also little doubt that the combined impact of demonetisation and the implementation of the Goods and Services Tax (GST) has taken its toll on the growth rate. The fact is that economists had warned that there would be a small impact of GST implementation, and this had been factored into all growth projections for India. Every macroeconomist also predicted that the implementation of GST would eventually give a boost to the Indian economic growth. But demonetisation was a different story because no-one expected it and while there have been some positives from demonetisation, particularly in changing transactional habits of Indians, and in the ability of the Government to track suspect transactions, there is no doubt that the process brought the economy and the country to a juddering halt, much like an Indian Railways locomotive applying its emergency brakes. And much like an Indian Railways locomotive, the economy has gotten going again, albeit slowly. While there are some sectors that are doing extremely well such as road-building and other urban infrastructure projects and the aviation sector, there was a huge impact of demonetisation on the Indian industrial sector with industrial growth going negative. Coupled with the systematic issues in the services sector, particularly in services exports, with news of layoffs in the Information Technology sector, this Government has a massive challenge in its hands to repair some self-inflicted damage.
Unfortunately, India is neither a stable economy nor has stable demographics. Job losses or even a sustained slowdown in jobs growth is a major issue for India as the country has the challenge of employing a million young people every month for the next few years. These jobs can be created if there was sustained economic growth of above seven per cent, although there are huge challenges there as well with challenges from automation. The current rate of growth is, however, not the end of the world but with an overstretched Government trying too many things on too many fronts, there are no answers on how the Government plans to turn around things. There are some easy solutions such as a ramp up of spending in the infrastructure sector, which is ongoing, but several headline projects, such as the planned high-speed rail network, are not even at the blueprint stage. With the Government mopping up oodles of money from surreptitiously increasing fuel prices, it would be prudent for them to deploy this extra cash on key projects. In addition, the Government should encourage PSU banks to pursue their cases against insolvent companies more strongly and faster because there is no doubt that the previous regime did leave a huge poison pill in bad loans to unfit companies. It is surprising that the former Finance Minister, clearly responsible for that mess, is criticising this Government. And after delivering on GST, the next major reform that the Narendra Modi Government has to come through on is much-needed labour reform. And of course, substantial rains this year could lead to an agricultural-led growth in the economy, but what will that say of modern IndiaIJ A country that still needs the monsoons to growIJ Not the hallmark of a country predicted to be the world’s third-largest economy soon.