The state of the Indian economy today is worrisome. The quarterly GDP growth rate is at a six-year low, the unemployment rate is at a 45-year high, manufacturing growth rate is hovering near zero, automobile sector is in the worst phase in 19 years, the investment rate is falling, fast-moving consumer goods sector growth is below nominal GDP growth rate, gross domestic saving rate is falling since the last 6 years, there is a trust issue in credit sector, people are losing jobs, inventories are piling up in industries and the list goes on.
Some experts claim that the current slowdown is a result of the cyclical process and things will return to normal in coming quarters while sceptics argue that the wrong policies and structural problems have pushed the economy into a prolonged slowdown. However, the reasons for the slowdown may be attributed to bad policies along with the rising trend of de-globalization and trade war between the U.S. and China. The principal factor is lack of demand across all sectors of the economy, be it food package industry or automobile industry. It indicates that the purchasing power of both the middle class and poor has fallen. The fall in savings rate further strengthens the fact that people are neither saving nor spending money which means either their income has decreased or has been stagnant.
The agriculture sector is in distress; the rural economy is struggling from very low inflation resulting in stagnant income, urban wages are either stagnant or decreasing due to less demand but more supply of unskilled labour. The primary aim of the Modi government on the fiscal front was to control inflation and fiscal deficit, and they have successfully kept it under control, but it seems that controlling inflation has backfired. Price of agricultural products is stagnant, resulting in farm distress and fall in income and consequent fall in purchasing power—which is directly related to lack of demand.
The increasing skill gap is resulting in a high unemployment rate of both rural and urban men and women. Two policies, lousy implementation of GST and demonetization has impacted the informal sector the most. Lack of liquidity in the market, the negative impact of demonetisation on small industries along with harassment of small and medium businesses in filing GST returns resulted in invoking the wrath of the market. The most surprising fact of all these happenings is that average income, in the absolute sense, has been rising from past many years at a good speed. Rising income should have boosted domestic consumption and demand, but the recent slowdown indicates that the fruits of growth went only to a small class of so-called “wealth creators”, wealthy and elite businessmen.
The rise in NPAs has indeed affected the working of the banking system and severely reduced credit growth. Pressure from the government to decrease the share of NPAs on the one hand and to increase lending, on the other hand, has pushed the banking sector into the doldrums. RBI has lowered the repo rate to a nine-year low to boost lending, but it seems to have no impact on the economy. RBI has also transferred extra surplus worth ₹1,76,000 crore to the government. It depends upon the government how it is utilised. If it is used just to overcome the shortfall in tax revenue rather than for capital expenditure, then it will be of no use.
Government has announced many measures to revive the economy, but all of them seem to be focusing on only the supply side of the economy, and the demand side is completely ignored. A look into the measures will further strengthen the fact. The capital infusion of 70,000 crores into public sector banks to increase credit rate and liquidity in the market will have no effect until the trust issue—which has paralyzed banking sector—is resolved. Moreover, it must be ensured that the credit is used for investment, which is a tedious task. The investors are looking at the government to revive the economy from slowdown so that they can invest, and the government is looking at investors to invest in the market to revive the economy. Both are looking at each other, and it’s resulting in nothing, and this is the most worrying situation.
The tax relief given to Foreign Portfolio Investors will do nothing to boost domestic demand. Merging the banks will surely enlarge the scope of their operation, but it will take a lot of time to come on the ground. Reducing repo rate to decrease the interest rate on loans will help only when the benefit is passed to the people, but the government has no mechanism to ensure that the benefit is given to people, all it can do is to appeal to the banks to lower the interest rates.
Now the question arises, what to do to revive the economy and where the government is going wrong. The usual measure to revive any economy from slowdown is to follow an expansionary fiscal and monetary policy that is to increase government spending. When India was facing a similar situation in 2008, the fiscal deficit went up to 6% due to the increase in government expenditure, but this government is committed to tight fiscal discipline. Ideally, the government should loosen its grip over fiscal deficit and should increase its expenditure on capital investment. The fiscal deficit will go upward, but it can be controlled later, the primary aim should be to revive the economy from slowdown.
Once the cycle of savings and investment starts, it will have a multiplier effect and will boost the consumption, demand and consequently, the income of people. It will result in higher tax collection, and then the government will have more free space to deal with the fiscal deficit. The government should prioritize its spending in rural areas because it is the most stressed sector in current times. Once the rural economy starts growing, the purchasing power of people will also increase.
The skill gap is another area which needs the government’s attention. Increased expenditure in education and human resource development will ultimately benefit the economy in the coming future. We need to learn from South Korea, which invested in human resource development in its early years and now it is giving fruits. South Korea is the only country in the world to have a GDP growth rate of over 5% for more than 50 years. In the banking sector, the government should focus on creating a healthy credit culture and the stricter implementation of Insolvency and Bankruptcy Code. It will result in a decrease in the share of NPAs, along with an increase in lending.
Most importantly, the Government must focus on covering the increasing income disparity between rich and poor. India’s richest 10% of people have 77% of India’s wealth, and the gap is continuously increasing. The perception that rich businessmen are “wealth creators” is myopic thinking, which rests on the claim that only rich people can contribute to the growth story of India. The focus must be on reviving agriculture sector and rural economy.
India has vast potential for growth, and if we succeed in raising the income level of the poor and lower-middle-class, then we may experience growth like never before.