Politics dominates news headlines. But the economy is always more important－and key to lifting the poor and the underprivileged from endemic want and hunger. Clever politicians layer over economics with populist politics, changing the popular discourse to their advantage. In recent days, several domestic and multilateral institutions have revised down growth projection for the current financial year. This hardly made headlines, though vitally concerns the everyday life of Indians. The International Monetary Fund on Tuesday reduced its GDP projection in the current financial year by a good 0.9 per cent－to 6.1 per cent.
Earlier the World Bank had pared growth projection by as much as 1.5 per cent to 6 per cent. The RBI itself has lowered the projection from 6.9 to 6.1 per cent. This was after the drastic slip-up in growth in the April-June quarter to 5 per cent. The international ratings agency, Moody’s, projects growth in 2019-20 at 5.8 per cent. The Bank-Fund projections are based on assessments of domestic experts, including those in the economic policy-making establishment. Notably, the Economic Survey in July had pegged the growth at seven percent this year. The Budget that followed projected a nominal growth of 12 per cent. With an estimated 4 per cent inflation, the real growth for the year which Finance Minister Nirmala Seetharaman projected was a healthy 8 per cent. What went wrong, then? Not all the blame can be left at the door of global factors.
The China-US trade war, the uncertainty in the Euro Zone, the turmoil in West Asia－though mercifully leaving crude prices largely benign, the latest World Economic Outlook reckons would at best account for a drop of 0.5 per cent in global GDP. The main factors remain domestic. Take, for instance, the latest Monetary Policy Report of the RBI which came out the other day. Flow of funds to the commercial sector has sharply declined. Between April and mid-September, it was a mere Rs 90,995 crores as against Rs 7,36,087 crores in the same period last year. It confirms in no uncertain terms the general slowdown in fresh demand for credit and expansion in financial and industrial sectors. Clearly, the fall-out of the reckless raids on the public sector banks that began in a real big way in 2007-08 and continued till 2013-14 is still holding back growth. Businesses are cleaning up balance-sheets while some others are facing up to the new reality of stringent regulatory controls against theft and profligacy. No doubt these are legacy issues.
But by now into its sixth year, the Modi Government ought to have managed to smooth over the banking sector mess. As the on-going woes of the depositors in the PMC Bank underline, the rot seemed to have been so deep-seated, cleaning up the Augean stables continues to burn a huge hole in the national purse. When the industrial and commercial sectors would be able to begin on a clean slate remains unclear. The resulting lack of fresh investment impacts current and future growth. Compounding the problem of slow growth is the crisis in the non-banking financial sector. Despite the concerted efforts to recover and restructure bad loans in the last five years, the non-performing asset ratio remains high. At the end of the current financial year it is expected to be at nine percent, down from 9.3 per cent at the end of the last financial year.
Under these circumstances, there is no surprise that the disbursal of credit remains poor in spite of repeated reductions in the prime lending rate. Of course, neither the successive cuts in the PLR nor the recent big-ticket cuts in the corporate taxes can have an immediate effect on growth. These will impact growth, given all other factors are conducive, with a time-lag of at least a year, though these can help boost economic sentiment. But, so far only bad news proliferates. Merchandise exports contracted by 6.7 per cent last month. In the first half of the current financial year, the exports declined by 2.39 per cent. Despite exports moving away from China, India has attracted little fresh demand. Vietnam, Bangladesh, Thailand, etc., are the major gainers.
Our labour and land laws are huge constraints. Labour-intensive exports such as garments, leather products, gems and jewellery have, in fact, been contracting over several months. Of course, it does not require reiterating that slow growth would impact GST collections. But a confused economic policy with the top government leadership remaining skeptical of further economic reforms and liberalization gives little hope of a faster growth. It will continue to rely on politics to trump economics and win elections. Which is such a pity, since it is actually in a position to push for bold labour and land reforms and set the economy on the path of high growth.