Revive demand in the economy
This must be the focus, even if inflation and fiscal deficit go up
When the Reserve Bank of India’s Monetary Policy Committee (MPC) met in October, it revised the projected GDP growth for the current fiscal year to 6.1% from 6.9%. Even this drastic downward revision was based on implicit optimism. The MPC expected
GDP growth in the July-September quarter to increase to 5.3% from 5% in the April-June quarter, and expected further revival in the second half of the fiscal year to 6.6%-7.2%. Recent high-frequency indicators suggest that such optimism might have been misplaced. The index of eight core sector industries has contracted for August and September. The fall in September, a 5.2% year-onyear decline, is particularly large. Nikkei Purchasing Managers Index (PMI) for industry was 50.6, marginally above the 50 threshold for contraction, in October. PMI for services already slipped below 50 in September. Given such signs, it is unlikely that the GDP numbers for the quarter ending September will show any significant revival.
There are reasons to fear that things might actually get worse. There’s a discernible sense of unease over the resilience of the non-banking financial sector. If growth does not pick up, there is bound to be a big shortfall in revenue collections. The Goods and Services Tax collections have been less than previous year’s collections for September and October. A big shortfall in revenue collection will have to be compensated by a cutback in spending, including on key welfare and anti-poverty programmes. At a time when the economy is already in a tailspin, this will hurt purchasing power and demand even more.
So, what is to be done? More than half the fiscal year is already over. The government should realise that its fiscal calculations that were made in the budget are unlikely to hold anyway. It needs to prepare plan B. The focus of this realignment should be on reviving demand in the economy. Even if inflation and fiscal deficit increase while trying to revive growth, there should not be any confusion on what the immediate priority is. India might still be the fastest-growing economy in the world, but we cannot take our growth for granted.