There has been a distinct persistent slowdown of the Indian economy for more than a year. This is reflected in the lower GDP growth of 6.8% in FY19 (7.2% in FY18). With the economy caught in crosswinds, India’s new normal is 5% growth. Sluggishness is obvious in India Inc.'s changing tone & tenor. Not triple but multiple whammy prevails--gloom in markets, declining sales, rock bottom core sector growth, job losses across industries, declining capex, rising compliance burden and decelerating corporate profitability. With corporate earnings not meeting expectations and sentiments plunging, the situation is getting uglier.
Over a period, the slowdown has embraced a number of highly connected sectors like real estate, automobiles, steel, cement, consumer durable goods and NBFCs. Super luxury, fashion firms and food services are also feeling the pinch. Notwithstanding recent measures to increase liquidity, the slowdown problem worsened with the tight liquidity situation since last September, the lingering NPA issues and limited fresh investment. The Budget was widely expected to provide a stimulus package thereby unleashing instantaneously the animal spirits. What the Budget failed to do needs to be accomplished now.
A spate of current flow of negative developments - be it poor financial results of bellwether companies or falling stock market indices, dismal tax collections, contagion impact of NPAs, rising corporate defaults and widespread lapses with respect to governance behavior have all led to emergence of a vicious cycle of problems.
These have resulted in poor sentiments across the country. Monetary easing by itself cannot provide solution to the serious slowdown and capex issues. A more coordinated approach using fiscal, tax, industry, trade, exchange rate management and monetary measures is called for while keeping an eye on enhancing competitiveness. Problems are both structural and cyclical. As structural aspects are more predominant, developing a national consensus for structural reforms is imperative.
Niti Aayog’s belief that a spate of long term economic reforms in recent years has resulted in immediate economic slowdown seems to have merit. Long term reforms and short term measures need to move simultaneously to make an impact. Government, indeed, has ushered in good work-in-progress reforms like GST, RERA and Bankruptcy Code but these though useful have been showing lapses, which hopefully are being corrected now.
Only pro-growth, pro-employment and responsible policies including fundamental factor market reforms (land, labour and capital) making them flexible need focused implementation. Structural problems cannot be solved through higher taxation alone. Squeezing out every penny through higher taxation rates or other means is likely to worsen the slowdown. Government needs to be careful in not killing India Inc., the golden goose that provides both revenue and creates jobs. India has had a myriad of structural impediments - poor infrastructure, distortions in land and labour markets and an inadequate skilled work force.
Sharp demand slowdown as reflected in meagre tax collections has made the budgetary arithmetic go awry. In the first quarter 2019-20, net tax revenue grew by a mere 6%. The FY20 Budget was built on an assumption of nominal economic growth of 11-12%, which is unlikely to fructify because of deepening slowdown. Instead, the economy requires revenues to flow from a growing economy, which is missing.
Global economy is posing more headwinds than tailwinds with deepening trade war and rising protectionism, to which India too has been a party. Weak global growth and falling trade intensity has shrunk India’s overall exports pie, which barely matches FY14 levels in nominal terms. Indian exports, which are necessary to revive economic activity, are battling amid the escalating USA-China trade war. There is also looming worry of increasing CAD, despite oil being 30% cheaper compared to FY14. Another critical issue is erosion in household savings taking place over the last 5 to 6 years. A study is needed on studying the implications of progressive reduction in key policy rates (likely to be followed by fall in bank deposit rates) on savings behavior of the household sector.
Industry leaders want a Rs 1 lakh crore stimulus but from where will the money come especially when there is limited fiscal space. An innovative fiscally neutral stimulus package to boost demand without burdening the exchequer can provide the only answer. Definition of fiscal deficit itself is being questioned. Finance ministry includes extra-budgetary resources (EBR) in the definition of debt but not in the fiscal deficit.
In sum, it seems ironical that India faces a slowdown challenge even as it is growing by almost 7%. Restoring the trust between Industry and the government is paramount. Though the budget has set a target of a $5 trn economy in next five years, specifics are vague.
The good news is that the Govt. seems to be going all out to tackle economic slowdown. Quicker transmission of interest reduction is being facilitated. Govt. is weighing options on easing FPI tax proposal. Sector specific initiatives for uplifting demand and investments are being studied. Increase in investment in rural projects is called for. With the budget coming out with massive infrastructure investments, there is need for effective monitoring, execution and follow up of implementation of projects.
Thus for fast and sustainable growth, structural and governance norms suitable for a liberalized environment are simultaneously required. The writer is an economist, and a former director of Economic Research & Training Foundation.
- Kiran Nanda
