Admitting that the economy needs fixing is the first step towards a solution
In a welcome admission that the economy is indeed in slowdown mode and needs to be fixed, the Economic Advisory Council to the Prime Minister has conceded that “various reasons had contributed to the slowdown of growth rate”. The admission, which is the first step to setting things right, comes a week after the Prime Minister's combative speech which made light of the first quarter growth figures (5.7 per cent), and suggested that critics, including those within the party, were overreacting to the disappointing numbers. He added that green shoots were in evidence since June, referring to the rising sales of tractors, commercial vehicles, passenger cars and two-wheelers as well as a pick-up in telephone subscribers. But with the EAC swinging into action, it would seem that those at the top are actually worried. The formation of the EAC marks a subtle concession to critics that economy managers in North Block and the NITI Aayog could have done better.
Even with the latest figures of industrial output for August showing a growth of 4.3 per cent, the best numbers in recent times (better than the 1.2 per cent growth in July and negative growth in June), there isn’t much to cheer about save inflation being stable at 3.2 per cent. The uptick in output is on account of mining and electricity generation rather than manufacturing. The October 4 monetary policy statement of the Reserve Bank of India paints a nuanced picture. It says, “The manufacturing PMI moved into expansion zone in August and September 2017 on the strength of new orders. On the services side, the picture remained mixed. Many indicators pointed to improved performance even as the services PMI continued in the contraction zone in August due to low new orders.” Hence the dominant narrative is that things are not getting better. The EAC cannot take chances here: capacity utilisation must cross the current levels of 72-73 per cent to 80 per cent for fresh investment and job creation to take place. The consistent decline in capital formation over the last five years needs to be reversed. Above all, the EAC should take cognisance of the fact that the troubles of the informal sector are not fully reflected in growth statistics.
The EAC has, however, identified far too many focus areas, 10 to be precise. This spans monetary policy, fiscal policy, the social sector, agriculture, the informal sector, “patterns of production and consumption” and much else. However, immediate concerns should not be lost sight of. Chief among these is to address the crisis in SMEs as a result of implementation of GST which has come as a double whammy after demonetisation. The EAC should, along with the finance ministry, reach out to industry representatives and address their concerns. That demonetisation and GST may have triggered a downward spiral of consumption and investment — the tepid festive season sentiment cannot be overlooked — must be fixed at the earliest. The EAC has its task cut out.