GDP at record low: Red light blinking

No one either in the Opposition or outside will question at least this particular official statistic. Gross Domestic Product grew in April-June 2019 the slowest in six years, at five per cent. Indeed, nominal growth, that is, the growth rate plus the prevailing rate of inflation, at eight per cent was lowest in 17 years. Welcome to New India.

It accords top priority to matters political while neglecting the economy. This is not to suggest that the global and cyclical factors have not added to the woes of the economy. Yet, a hands-on expert management would have reduced the impact of global headwinds while boosting economic sentiment.

The role of sentiment in contributing to the economic mood cannot be minimized. The Government virtually snuffed out all sentiment by producing a terrible budget, attacking the main economic players in the solar plexus just when they were feeling vulnerable due to adverse global and domestic developments.

The on-going US-China trade war, the uncertain West Asian situation, destabilizing potential of the Brexit, slowing European economies et al, were all signs which clever policy makers would have read to take mitigating action ahead of their deleterious fallout.

Instead, the amateur Nirmala Seetharaman produced a budget which left everyone shell-shocked. Investors voted with their feet, walking away in droves from the share markets. Since the budget the Sensex has lost about three thousand points.

The damage-control measures announced in recent weeks to stem the slide at best might have temporary impact, at worst they may turn out to be worthless in the absence of ~real~ reforms.

How the latest mergers of public sector banks will turn around the sentiment, or even improve the bottom-lines of merged entities, is unclear, especially when the ones announced sometime ago did not exactly set the Yamuna on fire.

In 2017, there were 27 PSBs. Now these will be reduced to 12. Infusion of fresh Rs 70,000 crores into these banks cannot guarantee a better credit take-off if economic climate continues to be subdued.

The latest GDP figures are unlikely to inspire the economic players to launch new projects or expand and upgrade existing ones. Manufacturing registered a mere 0.6 per cent growth, services, the main driver of the economy, seven per cent, construction, a capital-and labour-intensive sector, grew at two per cent and agriculture, which accounts for about 14 per cent of GDP but employs over 50 per cent of the labour force, also grew at two.

A panicky response to the dismal GDP number and the fear of a renewed run on the bourses has led to some urgent decisions such as reversal of most of the bad decisions in the budget.

Opening up of mining and retailing sectors to foreign investors, higher depreciation rates to the auto sector, higher than normal cuts in the prime lending rate by the central bank, etc., are very good.

Even the refinancing of the non-banking financial companies, which have been in doldrums since the crooked ILFS management sunk it deep into the bankruptcy pit last year, are in the offing. Yet, the economy refuses to show signs of revival.

One of the tools available with the government is to step up infrastructural spending. Unless demand picks up, and consumer confidence returns, it is hard to improve economic sentiment.

The coming festival season could boost spending but in the overall atmosphere of a creeping slowdown and recession it is unlikely to do much to boost growth.

As we have repeatedly emphasized in this space, there is no escaping grappling with the endemic impediments to growth which make the economy cost-heavy.

The factors of production be it land, labour or capital, besides, power, water, and other inputs have priced out the Indian economy from the export markets. Vietnam, Bangladesh, the Philippines, Thailand, etc. are a textile export hub due to all the above factors.

Indian textile exports remain virtually stagnant due to higher shipping costs aside from all the above reasons. Besides, the incentives to the garment exporters over the years have been vastly pared down. We cannot help but repeat for the nth time that the Prime Minister despite his best intentions cannot by himself manage everything. He needs the assistance of experts.

If he could get a well-respected professional S Jaishankar to helm the Foreign Office, he should shed diffidence and induct a world-renowned economist and entrust him with the charge of the Finance Ministry. We cannot have an amateur for a ministry which impacts every Indian’s life personally and directly. Stubbornness in this regard will prove harmful.

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