HOW TO REV UP THE ECONOMY

The worst fears of India’s policymakers seem to have come true. India’s economy grew at its lowest rate in the past five years as private investment slowed and agriculture, industry and exports continued to slacken. GDP growth in the January-March quarter of 2018-19 stood at 5.8 per cent, lower than market expectations and falling behind China for the first time in two years. Growth for the full year stood at 6.8 per cent, lower than the 7.2 per cent in 2017-18. The slowing

GDP growth underlines the consensus that India can no longer thrive on just government spending; it also needs a big private investment push. Private investment grew 7.2 per cent in the March quarter, down from 8.4 per cent in the previous quarter. Government spending, however, rose 13 per cent from 6.5 per cent ahead of the general election, widening the fiscal deficit in the last financial year.

NSSO (National Sample Survey Office) data, now released by the government, shows that India’s unemployment rate rose to 6.1 per cent in 2017-18. This data, withheld earlier but also ‘leaked’, showed unemployment to be the highest in 45 years. The government, however, maintains the new data is not comparable with previous surveys as the survey methodologies are different.

Most of the key components— manufacturing, construction and trade—slowed notably. Manufacturing, in particular, has been hit by a fall in both production and consumption.

The steel and cement sectors have begun to slow down. Meanwhile, urban consumers are battling a money-supply squeeze in the aftermath of the IL&FS crisis, while rural consumers labour under the effects of lower wage growth. An HSBC research note said a ‘soft’ growth data scenario is likely to continue into the next quarter (April-June 2019), following which growth might rebound to 7 per cent. “There are three reasons for this. One, a pick-up in activity as election-related uncertainties fade. Two, an improvement in banking sector liquidity. We find the liquidity situation generally improves over the months of June-August. Three, we expect the Reserve Bank of India (RBI) to remain supportive,” says Pranjul Bhandari, chief economist, HSBC India.

A weak economy should also prompt the RBI to further cut interest rates, maybe by 25 basis points in its next meeting, taking the repo rate (the interest rate at which the RBI lends to banks) to 5.7 per cent. The central bank has already reduced the repo rate twice by 25 basis points each. Meanwhile, corporate earnings grew at a six-quarter low of 10.7 per cent in the January-March period on weak consumer sentiment and lower commodity prices, said ICRA, the Indian arm of ratings agency Moody’s, on the basis of a sample of 300-plus companies.

According to D.K. Srivastava, chief policy advisor, EY India, one option for the new government to stimulate the economy is to front-load expenditures planned in 2019-20. For this, the government should bring out the annual budget for the current fiscal as quickly as possible. “One likely focus will be the rural and agricultural sector, given the continuing distress and the need for relief. To supplement the fiscal effort, there may be one more repo rate cut, which should be sooner rather than later in the fiscal year,” he says. This, he says, is unlikely to affect the inflation outlook, since the CPI (consumer price index) rate, at 2.9 per cent in April 2019, is still well below the mean CPI inflation target rate of 4 per cent. Further, even though food and vegetable prices have recovered from a previous sequence of contraction, the core CPI has actually fallen. A coordinated fiscal and monetary stimulus will help reverse the ongoing demand slowdown, he adds.

Coordinated fiscal and monetary stimuli will help reverse the ongoing demand slowdown