Over 28 years of economic reforms have made the Indian economy, with all its diversities and divergences, an interesting and unique case study of an ‘Evolving Economic Growth Model’. Present times are witnessing drastic changes in various fields.
New technologies developing fast. Labour market groping for a new normal affected by disruptions pertaining to global competition and structural changes. Demographic dynamics providing India an exceptional advantage of a rising young population.
GDP decelerated from 8% around mid-last year to 5% y-o-y in most recent quarter, significantly below potential. Downward corrections to growth by the RBI, World Bank, IMF, rating agencies, investment banks etc. are taking place.
Almost all placed India’s GDP growth at around 6% this fiscal, a big decline from last year’s already sub-optimal 6.8%. India is experiencing the slowest economic growth since 2012-13.
Recent sequence of economic news has been worse in several years. More worrisome trend is that of slow hiring. Confidence on job front is necessary to achieve sustainable high growth.
However, all is not gloomy. Some companies, being cost efficient and productive and sectors are seen to be bucking the slowdown trend such as ‘Festival’ categories, hospitality, fashion industry, food packaging, new economy and retail segments.
Interestingly, India’s huge economic potential continues to remain undented, is rather growing despite the economy undergoing a prolonged slowdown phase. Many foreign countries are increasing their investments in India.
India has many potential growth drivers—technology, affordable housing, insurance, young demography and leadership, backed by political stability. Much depends on formulation of policies and their execution as to how quickly the huge potential gets realised.
Causes of slowdown are galore and varied, like, fast-changing technology and changing skill requirements, large squeeze in credit availability emanating from NPAs and NBFCs－total new lending is likely to be barely 6.6% of GDP in FY20 (9.5% in previous fiscal), declining government capital expenditure because of falling gross tax revenue, rural household consumption at seven-year low－rural markets expanding at a lower rate than urban ones for the first time in seven years, recurring huge jump in onion prices indicating India not been able to fix its storage facilities and supply chain management of staple foods for years on end and decline in exports accompanied by a steeper drop in imports.
Strangely despite all efforts－many post-Budget structural reforms (massive corporate tax cut and five successive rate cuts by RBI), depicting government’s sincere efforts accompanied by promise of more proactive measures, animal spirits are not seen.
With Centre and States fiscal deficit nearing 9% of GDP and tax receipts falling below expectations, economic revival is taking long. Reforms like GST and Insolvency & Banking Code, though taken in good faith, require further reforms.
Banks and creditors nurse a feeling they have been ill-served by the Bankruptcy code. According to the latest Economist, “With the exception of a steep cut in corporate taxes earlier this month, to 25%, which brings India into line with other countries in the region, the official response has been scatter-shot and timid.”
All developments like above have led to pervasive and persistent grim sentiments. This got accentuated by a number of corporate developments that show unethical operations, mistrust and diversion of funds notwithstanding probable manipulated reporting.
The turnaround has begun, but difficult to say whether it is sustainable. Recent improvement in Ease of Doing Business indicates India’s huge potential. The aim should be to lift India into the ranks of the top 50 by 2020 from 63rd place this year.
Good news is that men are getting separated from boys implying economy started trudging on qualitative growth despite restructuring pains. IRCTC IPO was an ace played by the government. E-commerce sales are buoyant despite hiccups.
If India decides to sign the Regional Comprehensive Economic Partnership (RCEP) Agreement in November, the disruption to a number of producers could be severe. However, would be a corrective move which will make economy more competitive.
Push given to strategic disinvestments of select PSUs is a big positive. Pumping in taxpayers’ money to revive the struggling PSUs will not work without vital structural reforms.
World Bank chief advised India to work more on contract enforcement and land digitisation. India can revert to 7-8% growth if it continues to ‘attack’ the potential bottlenecks such as availability of real estate, infrastructure and labour laws.
Most cost-effective and sustainable solution will be to go all out to promote in all ways about six most heavily linked sectors. Most likely these would include the auto sector, real estate & housing, tourism, aviation, agriculture, services and some new economy sectors. NITI Aayog along with leading chambers of Commerce & Industries can be entrusted with finding out such specific sectors.
This way not only GDP growth will get an automatic sustainable push, employment opportunities will also increase alongside. For working out well-studied comprehensive measures to stimulate such sectors, the Centre and States need to work in tandem, thereby bringing about the desired fiscal federalism.
Bold actions are required to deal with India's banking crisis as without these, the economy would continue to remain dull for a longer period. Above submissions imply initially government’s policies will have to play the most crucial and responsible role. Multinationals desire stable, certain and predictable business environment.
There can be some pick-up in growth from quarter to next quarter due to the low base effect. Though India can grab a chunk of global trade in the wake of US-China disputes, investments will depend on aggressive reform measures of the right type. India needs to grow fast just to keep its vast workforce fully employed. Proactive thinking is the key to surviving an economic downturn.
Kiran Nanda is an economist, and a former director of Economic Research & Training Foundation.
