Modi 2.0: time to focus on the economy

The prime minister has said he wants to make India a $5 trillion economy with the help of the states by bringing in structural reforms and promoting exports. However, the Indian economy is currently facing a slowdown in all quarters—consumption, private investment and exports. A weak global and domestic demand has exacerbated the situation. India has lost the status of being the fastest growing big economy in the world as growth slipped to 5.8% in the fourth quarter (vis-a-vis China’s 6.4% growth in the March quarter) – the lowest in five years, pulling India’s annual growth below 7% for FY19.

Though the economy is expected to grow at over 7%, as projected by World Bank (7.5%) and RBI (7.2%), in FY20 with a probable rise in investment, exports and consumption, things look difficult as aggregate demand has slowed down, particularly private investment, over the last few years and consumption in recent months. India’s exports have either slowed down or been stagnant in the last few years, though exports figures show signs of recovery. And there is little fiscal space for government expenditure as it is committed to 3.4% fiscal deficit. GST and direct tax revenues fell short of projected numbers by over Rs 60,000 crore and Rs 40,000 crore respectively in FY19.

The slowdown in consumption, the biggest component in aggregate expenditure, is worrying. Several indicators show a slowdown in private consumption. Petroleum products consumption fell from 5.9% YoY growth in 2017-18 to 2.65% in 2018-19. FMCG grew at 13.6% in the fourth quarter, at least 2.3 percentage points lower than December quarter. Passenger vehicle sales grew at 2.7% in 2018-19, the slowest in five years. The credit to select sectors like power, roads and PSEs is down. Domestic air traffic fell by 4.2% in April 2019.

The demand created by the top 10% of the country’s socio-economic ladder is exhausting, thereby warning of an occurrence of a structural crisis. The onus of spending rests on middle and lower-income strata. However, depressed rural prices, the ever-increasing farm distress, lack of decent jobs for youth and overall moderation in the growth momentum led to weak private consumption demand.

Private investment shrunk majorly in the last few years. FY19 saw investments worth Rs 9.5 lakh crore, significantly lower than an average of Rs 25 lakh crore in the period 2006-07 to 2010-11. Domestic investment is dipping because of lower demand, excess capacity leading to lower profits of domestic firms and, of course, the persisting twin balance sheet problem, a serious obstacle for credit and investment growth.

An analysis by Financial Express of over 300 listed companies found that net profits dipped in the fourth quarter of FY19 by 18% YoY on average. Though credit growth picked up by 13.24% in FY19, after dipping in FY17, it has catered only to the government and high-rated customers. However, RBI can go for cuts in policy rates as consumer price level is well below the targeted level and under control. Credit flow at lower interest rate may help revive the investment cycle and boost consumer demand in sectors like real estate, automobiles, etc. However, the banking sector is yet to come out of stressed balance sheets and it needs major recapitalisation.

Foreign investment can become another source of investment. The US-China trade war is creating uncertainties for MNCs, particularly US firms in China, holding back further investments there. In fact, US multinationals are looking to India as a potential alternative. However, we need to improve our business environment on the ground, along with wide-ranging reforms including land and labour.

Another important component of aggregate demand is exports, more so when consumption and private investment are slowing down. Exports have been sluggish amid both international and domestic uncertainties. India’s exports stood at around $300 billion in 2018, which is almost equal to what it was in 2011. We cannot become a $5 trillion economy with just 1.7% share in world exports. The global uncertainties due to US-China and US-India trade frictions don’t augur well for Indian exports either.

China, India’s largest trading partner, is desperately looking for new markets to compensate for its loss in the US markets. India needs to capitalise on that. Further, the US has ended India’s access to the Generalised System of Preferences (GSP) trade programme, which allows emerging countries to export goods to the US without paying duties. Exports under the GSP scheme were from SMEs in labour-intensive agriculture and manufacturing sectors.

Though the demand for Indian exports may increase as US and China would substitute imports from each other, there is a doubt whether we are competitive enough to grab the market space. However, a prolonged US-China trade war will slow down global trade and hurt India’s exports. It’s high time we negotiated with China for market access as India’s exports to China is less than 1% of China’s total imports, whereas imports from China constitute 17% of our total imports.

Currently, the Indian economy is facing a slowdown. The crucial question is whether this demand slowdown is temporary or a more serious structural one. Hence, the government needs to take some immediate measures, like cutting and rationalising taxes on corporates, individuals and exports, address farm distress by offering direct cash transfers to marginalised farmers, and rate cuts by the RBI amidst low inflation.

Policies such as PM-KISAN, raising the MSP, encouraging R&D in cheaper irrigation facilities, fertilisers, growing hybrid seeds for farmers, opening up skill centres and educational institutes and creating job opportunities for unskilled non-agriculture workers will not only increase jobs and incomes but also boost consumption. But most importantly, the government needs to ensure revival of private investment and exports, through structural reforms including land acquisition and labour laws.

(The writers are Professor and Research Analyst, respectively, at the Institute of Economic Growth, Delhi)