Massive effort required to restore growth momentum

India’s economic slowdown has now become quite evident. The reasons are both cyclical and structural. It seems to have been largely fashioned by domestic factors. External factors like the US-China trade war, the Brexit uncertainty, the Middle East conflict, the unpredictability in the Iran-US tensions, etc., also impact on the economy to some extent. But India is not a major player in world trade, accounting for hardly 5% of world trade. Apart from cyclical factors, structural factors like the lack of sufficient consumer demand, decelerated growth in urban and rural wages, the spurt in unemployment, the paucity in investment demand and falling savings rate are all at the root of the current slowdown.

India’s GDP growth has been decelerating since 2017-18, with the RBI downgrading its growth projection for 2019-20 by 80 basis points, from 6.9% to 6.1%. GDP growth in the April-June quarter decelerated to 5%, from 8% in the previous quarter, the lowest quarterly growth in six years. The July-September growth is expected to be even lower, at 4.2-4.7%.

Overall industrial production, manufacturing, mining and electricity output declined by 4.3%, 3.9%, 8.5% and 2.6% respectively during September 2019, compared to September 2018, with 17 of the 23 sub-groups within India’s manufacturing sector showing drop in production. The situation is even more startling in the eight core industries, with their output dropping by a marked 5.2% as seven of the eight showed decline. This level of output is the lowest since April 2005. Vehicles industry output shrunk by 15.3% during April-October 2019, compared to April-October 2018.

The flow of commercial credit fell a whopping 88% during April to mid-September 2019 compared to the same period last year. The growth of bank credit also significantly decelerated from 12.5% in the first half of FY19 to 8.8% in the first half of FY20.

The sluggishness in the economy can be appreciated from the fact that exports declined by 2.3% in dollar terms in April-September 2019, compared to the year-ago period. Similarly, overall imports dropped by 7.01%, of which oil imports dropped by 8.22% and non-oil imports by 6.57%. This clearly demonstrates a highly subdued level of economic activity. The slowdown is also corroborated by the fact that the gross domestic savings rate declined from 34.6% in 2011-12 to 30.5% in 2017-18, and the gross investment rate from 39% to 32.3%.

Nearly 93% of the full year fiscal deficit target for 2019-20 of the central government was hit during the first six months of the fiscal itself. It is worrying that fiscal deficit during April-September FY20, at Rs 6.52 lakh crore, has already surpassed the full year fiscal deficit of Rs 6.45 lakh crore of FY19. The gross GST collection declined by 5.3% in October 2019 compared to October 2018.

Another worry is the continuing high unemployment situation. The NSSO unemployment figures released in May 2019 suggested a 6.1% overall unemployment level in 2017-18, the highest in the last 45 years. It is indeed appalling that during 2017-18, the unemployment rate among urban male youth was 18.7% and that among urban female youth was as high as 27.2%.

Challenges

The economic slowdown brings with it challenging consequences. Among them: Vulnerable sections of the population that had been pulled out of poverty earlier are at a high risk of being pushed back into the poverty trap; rural wages grew nominally by an annual rate of about 2% during the last three years, implying a contraction in real wages, affecting rural consumer demand; there is no certainty that the reduction in corporate tax will encourage companies to either plough back their higher profits into new or increased investments or to effect price reductions for consumers, given that there is a demand slump in the economy; and the slump in the construction industry in the urban areas compelled migrant labourers to return to the countryside, resulting in further overcrowding in agriculture.

Remedies

In light of the above assessment, the following policy actions are suggested to accelerate growth: One, since the government needs to quickly arrest the economic slowdown, it may consider doubling or trebling the amount given -- Rs 6,000 per year in three instalments -- under the PM-Kisan scheme; two, the government needs to introduce a degree of flexibility in its fiscal consolidation target so as to increase public investment.

The Centre must significantly expand the allocation for social schemes like MGNREGA, Pradhan Mantri Gram Sadak Yojana, Pradhan Mantri Awas Yojana, etc., both this fiscal and the next (2019-20 and 2020-21) to help boost consumer demand; to encourage rural employment, rural value chains need to be expanded; strict enforcement of rural wage and employment contracts should be ensured; strengthen the banking sector through stricter RBI oversight of banks and non-banking financial companies (NBFCs).

Further, since the BJP governs many states and enjoys a massive majority in the Lok Sabha, it must undertake both land and labour reforms; the Centre must undertake the promised infrastructure investment of Rs 100 lakh crore in five years, with significant involvement of the private sector; a committee should be set up to examine the trend of declining savings and investment rates and consumption and exports to accelerate growth; the GST Council should consider some reduction in GST rates to boost consumer demand.

Undertaking the massive effort needed to reverse this slowdown will not be an easy task. It will require determined efforts in many areas and directions simultaneously, and therefore a holistic approach and clear vision. The measures suggested above will help but even so, it will take time because the structural factors causing the slowdown are quite tricky and it will be some time before they are resolved.

(The writer is a former adviser, Asian Development Bank)