Post demonetisation, a revival of the Indian economy can happen only when the Government brings in some feel good policies. Goods and Services Tax glitches too must be addressed
Faced with a worrying decline in the gross domestic product (GDP) growth, industrial production and jobs, Union Minister of Finance Arun Jaitley chaired an inter-ministerial brain-storming session on September 19, with a view to create quickly-implementable measures to stimulate India’s economy. Railways and Coal Minister Piyush Goyal, Minister of Commerce and Industry, top bureaucrats from the Commerce and Finance Ministries, Niti Aayog vice chaiman Rajiv Kumar, and officials from the Prime Minister’s Office attended the session.
The key message that came out of the meeting was that the Narendra Modi Government won’t steer economic policies in a new direction, but generate fresh measures to galvanise the economy and implement financial plans rapidly.
“The group discussed areas which need greater thrust. Exports, industrial production, infrastructure and job generation were discussed as zones which need speedy stimulus,” said an official.
The group agreed that the Government will have to provide the fiscal stimulus the country needs. They feel the private sector, which has remained indifferent to the Centre’s attempts to get it to open its cheque books, won’t change overnight.
All participating Ministries presented the measures they had planned, as well as ideas on how to increase the speed of execution. For instance, the Railway Ministry had a slew of infrastructure plans that could involve the private sector and generate employment. The Commerce Ministry was asked to create a blueprint for incentivising exports to boost production and create jobs.
The cash crunch occasioned by demonetisation reduced demand, which in turn stymied industrial production. This caused GDP growth from 7.1 per cent in last year’s first quarter, to 6.1 per cent in the corresponding quarter this year. The figure for Q2 is even lower: 5.7 per cent. Various estimates say the note ban, touted as a crusade against hoarders of undeclared income and financiers of terrorism, has wiped out around 1.5 million jobs. Inflation had risen by almost one per cent this month alone. It was at an all-time low last month.
As for India Inc, it remains averse to the expanding job market in the near future, given the doubts about the manufacturing sector. A quarterly Federation of Indian Chambers of Commerce and Industry (FICCI) survey shows that as many as 73 per cent of manufacturers had no plans to hire new hands between July and October.
The Narendra Modi Government hopes the effects of demonetisation will slowly wear off, and that demand and manufacturing will increase again. But 74 per cent of the entities in FICCI’s report had no plans to add capacity in the coming months. The organisation recorded responses from over 300 companies from a wide array of sectors, with a combined annual turnover of Rs 3.5 lakh crore. Since private investment in manufacturing is likely to remain low for a few more months, the Modi Government decided to speed up whatever the public sector can do.
It hopes that in doing so, it will create a trickle down impact, encouraging the private sector at a time when macroeconomic indicators are positive: Global growth is showing signs of revival, Government revenues are improving, foreign exchange reserves ($400 billion) and oil prices are at reasonable levels, the money flow is encouraging, and a decent monsoon kept food prices in check.
Despite all feel good factors, Indian economy is heading for a “major depression” and it can “crash” soon if efforts are not put to revive it, BJP leader Subramanian Swamy has said. The Rajya Sabha MP claimed that a year and a half ago, he had written a 16-page letter to the Prime Minister Narendra Modi warning him about the economy, which is in a “tailspin”. “We need to do a lot of good things to revive the economy. Even a tailspin can be made to steady. If nothing is done, we are heading for a serious depression. There will be mass scale...banks may collapse, factories might start closing,” he said.
The Modi Government needs to get its act together on the economy to prevent big slippages in growth as well as to keep inflationary risks well under control. Economic growth had eased to its slowest in 13 quarters in the April-June quarter of the current fiscal year and full year growth is expected to be around seven per cent. Much of the slowdown in the second half of the last fiscal year and the first quarter of the current fiscal is a result of the shock demonetisation announced on November 8 last year.
Growth in the current quarter and perhaps, even the next is expected to be impacted by the implementation of the Goods and Services Tax (GST) on July 1 this year. Both, demonetisation and GST were disruptive moves, but the Government needs to be more pro-active in relieving the pain caused by them.
What should concern the Government is that there is some despondency settling in — businesses continue to remain slow, save recovery in sales of automobiles.
High frequency data points to several risks to India’s growth. The index of industrial production for July was up 1.2 per cent and that’s mostly because mining output and electricity generation have been rising. Manufacturing sector growth remains insipid, expanding only 0.1 per cent on a year-on-year basis in July. Inflationary pressures are returning — and not just on account of fruits and vegetables alone. Petroleum product prices too are responsible for the higher reading of both consumer price index and wholesale price index.
The wholesale price index for July shows petrol and diesel inflation climbed to 24.6 per cent and 20.3 per cent respectively. To compound the economy’s woes, exports have not been doing too well, even though growth has picked up in exports headed to the US and Europe. Gems and jewellery exports fell almost 26 per cent in August, compared to a year ago. Bank credit growth to industry has also been poor for several months now, a clear indicator that private investment has not yet picked up.
The onset of the festival-wedding season normally boosts demand, particularly for consumer durables. likewise, a good monsoon may prove beneficial for agricultural output.
But these alone are not enough to get growth well over seven per cent, a prerequisite for job creation. In the short term, consumer and investor sentiments need to improve, and that can happen if the Government affects some feel good policies.
lowering taxes on petroleum products could be one such move. However, for more stable and rapid growth, the Government needs to address glitches arising out of implementation of the GST.
It also needs to address the problems of farmers, who are bearing the brunt of price volatility in particular, rather than take knee-jerk decisions on imports and exports. In short, the Centre needs to demonstrate that it is still very much in charge of the economy.
(The writer is a retired Professor in international trade)