Let us face the bitter truth. The economy is slowing down, irreversible it would seem. There is nothing to show that growth will pick up anytime soon. Basically, the reason is two-fold. One, lack of domestic demand and, two, a slowing global economy. We are fortunate to have global crude oil prices ruling at historic lows. Otherwise, the fiscal situation would have been worse. Why the economy is unlikely to emerge from the current downturn is there for all to see. We are still to overcome the coronavirus challenge. Despite the relaxation in the lockdown, or more likely because of it, the number of infections is rising daily. Bombay, the financial capital, and Delhi, the political capital, are both in a particularly severe grip of the virus. State governments in both cities seem unable to cope with the challenge. With millions of migrant workers back home, or on their way home, such industries which are in a position to restart are short of minimal working hands. The sharp demand for work under the national rural employment guarantee scheme underlines the changed mood of the unskilled working age population. It would rather earn less but try and stay closer to their native places rather than move thousands of miles away to big towns in search of work and, thus, risk such unforeseen crises which the pandemic shut-down of the economy has inflicted upon them. There is a psychological comfort being closer to near and dear ones even if the daily earnings are relatively meagre. Not that the economic conditions in the towns and cities they are leaving behind in droves are much better. Despite the reopening of markets and most other establishments, the fear of the virus and the uncertainty of an assured regular income has led to a near-absence of demand. People are conserving their savings. Discretionary spending is out for the time being. The government may have substantially hiked the minimum support price for paddy and a few other crops but that risks inflation at a time when consumers are already feeling the pinch of the slowdown.
The downgrade of the country’s sovereign debt rating by Moody’s Investors Service to the lowest rung of investment grade might have already been factored in the by the markets but nonetheless it will make fund-raising by private players from foreign investors costlier. Besides, there is too much liquidity sloshing around in the economy thanks to the serial steps taken by the central bank to ease lending by banks at still lower rates. Yet, if there are hardly any borrowers to avail of the funds made available to the banks and other sector-specific lenders it reveals a growing uncertainty about the economic environment. The mood in the business community is decidedly negative. In such bleak conditions, government spending alone remains the big hope to spur growth. However, government spending entails risks. Indeed, the rising government debt was a factor in downgrading the country’s sovereign rating. Higher government expenditure causes fiscal stress. Ratings agencies reckon that the collective deficit of the central and state governments this fiscal would likely touch 12 percent of the GDP. In fact, government appropriates a very large portion of the public savings, leaving little for private investors.
This fiscal government debt is set to rise from 70 percent of GDP to 84 percent. In some developed economies government debt is much higher but they have the capacity to absorb the pressure thanks to a much larger size of their economies. On top of all these factors, the misdirected campaign for Make in India is bound to add to the woes of the economy. For instance, it makes little sense to try and set up manufacturing facilities for air-conditioners and TVs, and such like household goods when these can be easily and relatively cheaply sourced from foreign manufacturers. India cannot grow by focusing on what can only be termed a screwdriver economy. Protectionism will be painful for consumers. We cannot become a hub for global manufacturing a la China as long as our land, labour, energy and laws continue to be adversarial towards foreign investment. Let us not delude ourselves. If we pull down the battens in the hope to spur Make in India, we will achieve nothing. We are essentially a service economy. Let us find ways to enhance our attraction to the world in the IT sector. And if the government is still sold out on Make in India, it should prove its credentials by making the costs of land, labour and energy as competitive as in China. Slogans do now sway hard-nosed investors. Conditions on the ground do. And those conditions are set to become worse before they get any better. The economy will remain in deep funk in the foreseeable future. Indians will have to tighten their belt further.
