Q. Is the government reading the slowdown right? Are the measures they have taken so far to revive the economy in the right direction and enough?
A.N.R. BHANUMURTHY Despite the 5% growth number for the first quarter, some official economists still seem to be brave enough to suggest that the ‘slowdown is exaggerated’. And this may also be due to the RBI’s assessment of the growth slowdown as more
of a cyclical one. In my view, the initial slowdown was cyclical and, as we have not noted this carefully, it has actually become structural. Measures were needed to address both the factors. The government came out with some sensible measures, although they are not sufficient, and it is expected to come out with some more sectoral measures. We hope that those measures can help revive the economy.
The government is certainly focused on the issue. But it cannot be fixed so easily, because some of the underlying causes are structural and the slowing GDP growth is a cumulative outcome. Addressing the issue of quicker dues settlement of the MSME sector was long overdue. Correcting some of the anomalies in tax laws was also good. But lots more will need to be done. We probably need a big fiscal push combined with reforms in sectors like agriculture and labour. But there is not enough fiscal room, which means resources will have to be raised via privatisation.
No. Talk about sops to the auto industry, selective reductions in GST rates, interest rate cuts all seem like trying to put band-aids on a seriously injured person. The main problem has been the government’s attempt to try to formalise the economy overnight. Misguided policies like demonetisation, chaotic implementation of GST and flip-flops on specific rates and trying to force the use of technology in social services are the obvious examples of this. Command and control policies do not work, as we know from the experience of India during the licence-control Raj. Similarly, you cannot turn an economy of India’s size and complexity into a formal one overnight as much as China’s attempt to industrialise a primarily agricultural economy in a few years in the late ’50s ended in a disaster of incredible proportions.
The recent measures announced by the government are aimed at addressing the pain points in the economy and lifting the sagging business and household sentiment. The countercyclical tools typically used by authorities to stimulate
“WE NEED A BIG FISCAL PUSH AS WELL AS AGRICULTURE AND LABOUR REFORMS. WITHOUT ENOUGH FISCAL ROOM, RESOURCES WILL HAVE TO COME VIA PRIVATISATION” —AJIT RANADE
demand are the monetary and fiscal policies. The fiscal policy is constrained to support the economy due to the Fiscal Responsibility and Budget Management Act (FRBM) targets. The onus of reviving the economy, therefore, is on monetary policy, but its effectiveness is a bit challenged because of tardy transmission of RBI rate cuts to lending rates. In this setting, although the announced steps are in the right direction, they are unlikely to have the heft to pull up growth towards 7%, which is the average of the past 14 years.
I am glad that the government has finally read the writing on the wall. If the sceptics of the official GDP estimates are correct, the slowdown could be more severe. Measures announced seem in the right direction, but [one] cannot gauge the speed of the recovery without reading the fine print of the stimulus measures announced.
The government’s reading appears to be focused more on the shorter term demand slowdown. The measures are sectorally oriented. The direction of reforms is right, but these are not enough. What we need is a broad-based fiscal stimulus injected through infrastructure investment.
It is not clear how the government is reading the slowdown, except for its insistence that it is cyclical and should, therefore, correct itself. If this is indeed cyclical, then the government would need only expansionary fiscal/ monetary policies to correct the trajectory. If, however, it is structural, as many economists think, policies will have to directly target the structural constraint.