Poll And NaMon­ics

Eco­nomic is­sues will have de­ci­sive say when Modi would seek next term in Lok Sabha

The Day After - - CONTENT - By AMit kApoor

It is be­com­ing re­ally hard to be op­ti­mistic about the In­dian econ­omy. As TN Ni­nan pointed out last fort­night, it has been six years since the econ­omy breached the seven per­cent growth rate mark. There have been re­peated fore­casts in these last six years of re­gain­ing those glory days of 2003-11, when In­dia man­aged to grow at an an­nual rate of 8.4 per­cent.

But in ev­ery quar­ter, there ex­isted a con­ve­nient tran­si­tory phe­nom­e­non to ex­plain away the poor growth statis­tics. Ini­tially, it was the slug­gish world econ­omy with a cou­ple of drought years in be­tween and of late, it has been the af­ter ef­fects of de­mon­e­ti­za­tion and the hastily im­ple­mented Goods and Ser­vices Tax (GST).

What­ever the rea­sons, the numbers that have been emerg­ing in the last two weeks are quite damn­ing for the short­term prospects of the econ­omy. In Q1 of 2017-18, GDP grew at 5.7 per­cent, mak­ing it the fifth con­sec­u­tive quar­ter in which growth rates have fallen. The coun­try’s in­dus­trial ac­tiv­ity as mea­sured by the In­dex of In­dus­trial Ac­tiv­ity (IIP) has merely ex­panded by 1.7 per­cent be­tween April and July as against 6.5 per­cent over the same pe­riod last year. The weak­ness on the in­dus­trial front is un­de­ni­able.

In­fla­tion fig­ures have also not been promis­ing. Con­trary to the warn­ings a few months ago of a de­fla­tion­ary trend across the econ­omy, the Con­sumer Price In­dex (CPI) grew by 3.36 per­cent in Au­gust af­ter ris­ing by 2.36 per­cent in July. There­fore, af­ter three months of a fall in in­fla­tion numbers be­fore July, the prices are back to their usual trend of mov­ing north­ward. This elim­i­nates all pos­si­bil­ity of RBI mak­ing any fur­ther rate cuts in its next pol­icy re­view. So, the mone­tary route of giv­ing the econ­omy a boost is all but closed.

Any­how, the prob­lems of the econ­omy are such that they can­not be merely ad­dressed through the mone­tary route. There are four en­gines that usu­ally drive growth in an econ­omy and cur­rently all are sput­ter­ing on fumes. These are: pri­vate in­vest­ment, pri­vate con­sump­tion, ex­ports and gov­ern­ment ex­pen­di­ture.

Pri­vate in­vest­ment has taken the worst hit over the last few years, es­pe­cially since the prob­lem of bad loans with banks started spi­ral­ing out of con­trol. Gross fixed cap­i­tal for­ma­tion as a per­cent­age of GDP has con­sis­tently fallen from its peak of 34.31 per­cent in 2011-12 to 29.55 in 2015-16. Since banks are wary to lend out fresh loans on ac­count of their ris­ing non-

per­form­ing as­sets (NPAs), these fig­ures are not ex­pected to see any up­turn any time soon.

To add to the mis­ery, pri­vate con­sump­tion trends are also not help­ing. Growth has been merely 6.7 per­cent this quar­ter over Q1 of last year -- a six quar­ter low. This just might be a short-term blip as peo­ple might have post­poned spend­ing due the im­ple­men­ta­tion of GST, but be­ing com­pla­cent and wait­ing for con­sump­tion to pick up is ob­vi­ously not the best way for­ward.

Ex­ports, which had been the lead­ing driver in In­dia’s “be­yond-seven” growth years, grow­ing at rates of 20 per­cent and 16 per­cent in 2009-10 and 2010-11 re­spec­tively, have fallen to sin­gle digit growth rates since. In fact, in 2014-15 ex­ports fell by 5.3 per­cent. How­ever, re­cent re­ports show that it has grown by a lit­tle over 10 per­cent over the last year. How­ever, as Swami­nathan Aiyer pointed out re­cently, it will still not suf­fice for In­dia’s growth as­pi­ra­tions as no coun­try has achieved a growth rate of over 7 per­cent or more un­less its ex­ports had grown over 15 per­cent an­nu­ally.

Fi­nally, and most im­por­tant of all gov­ern­ment ex­pen­di­ture, which has been the sav­ing grace un­til now seems to be run­ning out of steam. Gov­ern­ment spend­ing has grown sharply since the first quar­ter of last year and has even in­creased by dou­ble dig­its post-de­mon­e­ti­za­tion peak­ing at around 17 per­cent last quar­ter. This has been a ma­jor fac­tor in prop­ping up what­ever lit­tle growth the econ­omy has wit­nessed. How­ever, in the process the gov­ern­ment had al­ready ex­hausted 92.4 per­cent of its an­nual tar­get of fis­cal deficit. To meet the 3.2 per­cent tar­get, it will be forced to cut ex­pen­di­ture. There­fore, the fis­cal route of re­viv­ing the econ­omy also seems to be clos­ing along with the mone­tary one un­less the gov­ern­ment de­cides to breach the fis­cal tar­get, which will dam­age its hard-earned cred­i­bil­ity and is ill-ad­vised.

So, what can the gov­ern­ment do to move closer to the oft-promised seven per­cent growth re­al­i­ties? It is clear that the prob­lem is not tran­si­tory. It seems more struc­tural in na­ture and needs a struc­tural so­lu­tion. The prob­lem of NPAs can­not be over-em­pha­sized. Bad loans have be­come the Achilles’ heel for the gov­ern­ment that it has been un­able to rem­edy. Pri­vate in­vest­ment has been held up be­cause of it and it is un­de­ni­ably a vi­tal driver of eco­nomic growth. Gov­ern­ment in­vest­ment alone can­not push higher growth as is slowly be­com­ing ev­i­dent.

There­fore, re­cap­i­tal­iza­tion of banks should be the top­most pri­or­ity on the gov­ern­ment’s agenda and it should brain­storm ways of do­ing so. Dis­in­vest­ments can be a source of rev­enue for the same and since the stock mar­kets are on a high, it just might be a vi­able op­tion. There are no easy an­swers on the best way to re­vive the econ­omy, but whichever path the gov­ern­ment chooses will have a lot of say in de­ter­min­ing the fu­ture of the In­dian econ­omy and the mag­ni­tude of an even big­ger prob­lem which hardly any­one is dis­cussing yet: that of grow­ing unem­ploy­ment. More im­por­tantly, for the gov­ern­ment, all of these cu­mu­la­tive is­sues will have a lot of say in de­ter­min­ing the 2019 elec­tion out­comes. One can only hope for the best.

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