It has been an eventful August thus far. Starting from the abrogation of Article 370, the disintegration of the state of Jammu & Kashmir into two UTs, the untimely demise of former External Affairs Minister Smt. Sushma Swaraj, the Independence Day celebrations, Kashmir issue being discussed at an informal meeting by UNSC members, half of the country under flood’s fury and the untimely demise of former Finance & Defense Minister Shri Arun Jaitley.
The issue that has been the talk of the town is the economic slowdown India is facing; the second such since the Global Recession, 2008. India’s economy grew by a mere 5.8% in the last quarter (Q4) of the previous financial year (FY19). The figures for the first quarter (Q1) (April-June) are not out but are estimated to be even lower than the previous one, at approx. 5.5%. Unemployment rates are worst in the last 45 years. Moody’s has slashed India’s growth forecast for 2018-19 to 6.7%, from the earlier estimate of 6.8%. The growth rate of the current financial year has been pegged at a mere 6.2%. Meanwhile, India lost its spot of the fastest-growing major economy of the world to China. India that became the 6th largest economy in the world, surpassing France, has again slipped to the 7th spot.
The sector-wise performance looks even grimmer. Auto-sector‘s sales have dropped by 18.71%, its worst performance in two decades. This has forced the sector to lay-off 15,000 employees, mainly comprising of temporary and casual workers. The sales of Fast Moving Consumer Goods (FMCGs) is facing the same issue of declining sales. Sales have dropped across FMCGs sector, from biscuits to innerwear. Parle Pvt. Ltd., India’s largest biscuit manufacturing company has said, to adjust to the decline sales, the company would be forced to lay-off around 10,000 workers. The same is the case with the real estate sector.
The banking sector is reeling under many challenges; prime among them is the Non-Performing Assets (NPAs) crisis. Bad loans with the banks are to the tune of over ₹1 lakh crore; that has eroded banks’ capacity to lend. Non-Banking Finance Companies (NBFCs) haven’t performed poorer. IL & FS and its subsidiaries have defaulted on payments, and their outstanding loans stand at about ₹1 lakh crore. Performance of Dewan Housing Finance Company (DHFL) has been exactly the same. This has left the market with a huge “liquidity crunch“. Agriculture-sector faces many challenges and for a long time. The thing with this sector is that, since it’s deeply connected with the other sectors of the rural economy, any mishap in this sector has a spillover effect on other sectors as well.
Indian economic growth has been largely bolstered by two factors: “government spending” and “private consumption”. Though the government can raise money through many sources, it has to be mindful of its spending, if it has to maintain a strict fiscal discipline. The fall in sales across segments reflects an erosion of consumers’ power to spend, i.e., a reduction in private consumption. If we look at figures of non-oil, non-gold imports, which is a clear indicator of domestic sales, it reflects that sales have contracted steeply.
To propel economic activity, the RBI has already revised its monetary policy and reduced the repo rate (the interest rate at which RBI lends, generally against G-Secs) by 110 basis points, since February this year. In the Union Budget, presented in July this year, a bank recapitalization of ₹70,000 crore was announced, to enhance credit growth in the economy.
For the short term, the government can boost fiscal stimulus by increasing its spending. But this solution has its limitation of disrupting the fiscal discipline that the government needs to maintain. Another short-term solution is GST rates cut across segments. This will propel economic activity but would lead to a reduction of the government’s revenue, which it needs for various spending.
The government needs to think of rigorous structural reforms that not only address the current crisis but prevents the same from occurring in the future. In the Union Budget, the government had provided several incentives to banks, so that they could lend more to the NBFCs. This is a tricky decision since the prime reason for the crisis—in the banking sector in particular and the economy in general—is the ill performance of the NBFC sector. Instead, steps should be taken to de-link banking and NBFCs sector, so that any problem in one of them doesn’t have a spillover effect on the other one.
Securities & Exchange Board of India (SEBI), the regulator of the financial market of India, recently eased several regulatory restrictions that will make it easier for Foreign Portfolio Investors (FPIs) to invest in Indian markets. Similar incentives should also be provided to attract FDIs in India, which are largely leaving India’s shores.
One of the prime reasons India is facing the huge unemployment crisis is that India bypassed the manufacturing sector and directly moved on to become a service-based economy from an agriculture-based economy. To find an example of the manufacturing sector having huge potential for employment, exports and overall economic growth, one doesn’t need to look far and just needs to look at China. To do the same in India, “Make in India” should not just remain a slogan but should be promoted vigorously. “Ease of Doing Business” should be further eased, proper infrastructure should be put in place, investors should be provided with various incentives to invest, and exports should be promoted.
A requisite reform is disinvestment of government in Public Sector Units (PSUs). This should be carried out slowly and in a phased manner and not in the way being carried out today—where one PSU goes on to buy another one, and the government claims disinvestment. Also, a large amount of public land is lying idle with the government. This should be sold or leased out to create infrastructure, housing, industries, etc.; that would propel further economic activity and give considerable dividends to the economy.
Also, the form Chief Economic Advisor (CEA), Arvind Subramanian asserted that India’s method of calculating its GDP is flawed, and its GDP growth rate is overestimated by at least 2.5%. Instead of questioning him on the nationalist ground and questioning his patriotism, his claim should be researched because wrong statistics would lead to wrong policies.
Reforms should be introduced to remove the various bottlenecks affecting the economy. This will enhance economic activity, generate employment, that in turn will enhance income level, leading to an increase in private consumption, thereby leading to the much needed economic growth.