The dip in GDP growth

Find ways to boost demand, and reassure the finance sector

India’s GDP grew by 4.5% in the three months ending September, the lowest since March 2013. It highlights the current economic crisis, created by factors both structural and cyclical, domestic and global. It comes after the 5% GDP growth in the June quarter. The slowdown is evident across manufacturing and agriculture. At this stage, only three questions matter. The first is whether growth has bottomed-out. The just-ended festive season makes it difficult to use high-frequency indicators

(basically data released with higher frequency than a quarter, say a month; one example is car sales) to arrive at this conclusion. But senior bureaucrats in the finance ministry believe that the third quarter will see an improvement. Since October, the government has also taken measures to address the slowdown. On the flip side, the eight core sectors contracted by 5.8% in October and late rains destroyed some crops, indicating that the third quarter may have been off to a poor start.

That brings us to the second question. Is enough being done? The finance minister, speaking in Parliament earlier this week, mentioned 32 measures the government has launched to spur growth. It has cut corporate taxes, announced a real estate fund, embarked on an ambitious divestment exercise, and also merged banks. But it needs to do more. The finance sector faces a crisis of confidence, and there are fears that the problems witnessed in a few shadow banks could hurt the entire financial sector, spilling over into mutual funds and banks. Rural demand continues to be low, largely a function of the ongoing agrarian crisis, itself the result of a lack of market focus, poor risk management, and adverse weather conditions.

The obvious third question is whether the government has enough headspace to provide a stimulus. The simple answer is no. But, perhaps, it is time to forget about the fiscal deficit for a bit and address the larger issues in the economy —which will be almost impossible to do without a spending spree. To be sure, the Reserve Bank of India can be counted on to recognise the spike in inflation in October as a result of a temporary shortage of vegetables and cut the policy rate, like it has done through the year. But the government needs to continue to find ways to boost aggregate demand, even as it does enough to reassure the finance sector. A bad-loans bank, a cut in income tax rates, a rural package — everything should be evaluated.