K M Chandrasekhar
K M Chandrasekhar

The Economy, stupid

K.M. Chandrasekhar

K.M. Chandrasekhar

In these columns, I have written more than once about the state of the Indian economy. I have said that the last Central Budget was largely disappointing and failed to take into account what needed to be done to bale out the economy. In one of my columns, I described a similar situation that arose in 2008, a situation that arose out of a global crisis precipitated by subprime mortgage lending in the United States, the measures that India immediately took to deal with the situation and the speed with which our economy recovered.

The situation has worsened even further. The April to June quarterly GDP growth rate shows that it has plunged to 5 per cent. Said Kunal Kundu, India Economist, Societe General, Bangalore, “The sharply lower growth caught me by surprise. The economic slowdown was palpable but I thought the lower deflator would come in handy.But the extent of slow down is beyond what I expected.” Sakshi Gupta of HDFC Bank, stated that the slowdown is being felt across sectors, including agriculture, manufacturing and services. Across the board, there was dismay, bewilderment, but still there was a lingering hope that we are reaching the bottom of the cycle and that upward movement will start with higher retail sales in the festive season.( India Today, August 31st). Growth rate projections have been brought down substantially by various agencies. Citigroup brought down growth forecasts for 2019-20 from 7% to 6%. Goldman Sachs from 6.9% to 6%, Bloomberg Economics from 7% to 6.6%. Oxford believes the growth rate may fall below 6% ( Business Standard, September 3rd). Activities of eight core sectors fell to 2.1% in August. The automobile sector is facing a deep crisis, unemployment is rife, production is being cut by different manufacturers as vehicles remain unsold. The Nikkei Manufacturing Purchasers Index fell to 51.4, the lowest since May 2018. This has been a long, lingering slowdown too, 18 months as of June 2019, according to Goldman Sachs.

In part, as in 2008, global factors have played a role in dampening growth dynamics. The World Trade Organisation, in its press release of 2nd April, highlighted the need to ease trade tensions that have arisen out of President Trump’s determination to discipline China and China’s typically oriental response of waiting it out until the outcome of the US Presidential election becomes clearer. As the Director General of WTO, Brazilian Roberto Azevedo, put it, “ Trade cannot play its full role when we see such high levels of uncertainty. It is increasingly urgent that we resolve tensions and focus on charting a positive path forward for global trade which responds to the real challenges in today’s economy - such as the technological revolution and the imperative of creating jobs and boosting development.”

While the dark clouds hovering over the global trade horizon are bound to affect India’s trade prospects, the fact that the share of Indian exports is only less than a fifth of India’s GDP gives the country considerable headroom to find solutions internally. The views expressed by Dr. Manmohan Singh, who can justifiably be called the father of India’s economic turnaround should be heard with respect, not casually dismissed as a political statement.” The state of the economy is deeply worrying,” he said. The last quarter’s GDP growth of 5% signals that we are in the midst of a prolonged slowdown. .” He urged policymakers to “reach out to all sane voices and thinking minds, to steer our economy out of this man-made crisis.” In my view, the important point at this time is to transcend the limitations of politics and for the government to hear all views from all sides with patience. Brainstorming sessions, involving political parties of all hues and business interests, may generate new ideas and also a willingness to travel together for the sake of the country.

The Finance Minister, obviously new to her job, is beginning to see the lurking dangers of the present situation. The news media are replete with stories about the impact the present situation has had on the poorest sections of society. That unemployment has increased significantly is no longer secret. Day after day, news channels broadcast horrific stories of desperate people trying to feed their families with meagre wages, and that too, earned in a few days in the month. Despite the start of the festive season, sales are slow and sluggish. Rural incomes are virtually flat and rural consumption is flagging.

The Finance Minister announced a few measures last week to invigorate the economy. She announced capital infusion of ₹ 70000 crore into public sector banks, which, she hoped will provide liquidity into the system of ₹5 lakh crore She rolled back the surcharge on foreign portfolio investors levied in the Budget. Surcharge on long and short term capital gains was withdrawn. Some concessions were made for the auto sector, such as allowing vehicles with emission standards BS IV bought before 31st March, 2020, to remain operational for the full period of their registration. The decision to hike one time registration fee on vehicles was deferred, the ban on purchase of new vehicles by government departments lifted and an additional 15% depreciation allowed on vehicles registered until March 2020.Thankfully, the big question mark on the future of vehicles using internal combustion engines has been removed. Those who postponed purchase of petrol and diesel vehicles fearing that they will be swept off the roads by statutes compelling use of electric vehicles can now go ahead and buy vehicles of all descriptions as it has been confirmed that compulsory use of electric vehicles is no longer in the government agenda.Then came the decision to merge banks, but from the point of view of salvaging the economy, it is more drama than substance.

Minister Nitin Gadkari, speaking at the annual convention of the Society of Indian Automobile Manufacturers was explicit in stating that the government was aware that the automobile industry was facing a slowdown. He made it clear that there was no deadline contemplated to move to electric vehicles and that the demand to cut GST on vehicles, at least for a limited period, would be considered. He mentioned the possibility of other incentives for the industry, including support for exports. To push up the level of public spending, he said 68 road construction projects will be started in the next three or four months which would push ₹ 5 lakh crore into the economy.

All these are good signs but will they really percolate down to the bottom of the pyramid? Will they generate momentum for sustained growth? The Indian economy, like the Indian State, is an agglomeration of sub-economies, each of which has its own characteristics. The federal system of governance provides a unique opportunity to create conditions for harmonious growth of the whole. The State Governments and even local bodies can play a role in kickstarting economic activity in their respective areas. This is particularly important because it is consumption that fuels production and production, in turn, that spurs investment. If we are able to generate consumption at the lowest level, it will generate forces that will bolster production and investment. Concerted action by the Centre and the States is needed at this hour. The Centre must take the lead.

Each production sector also has its own problems. Whether it is real estate or automobiles or mining or power, there are many problems specific to that sector. While an economic slowdown causes turmoil and suffering, particularly for the poorest of the poor, this can be turned into an opportunity to clean up each sector and wipe out the effects of ill considered past policies. This, by itself, can create an impetus for growth. The Finance Minister has stated that she is holding sectoral meetings. These meetings must not be confined to immediate short term problems, they must seek to address the disease that lies deep down in each sector.

Banks and financial institutions will have a major role to play in the recovery of India. In the last few months, RBI has done well. It has strived to infuse liquidity into the system, reduced interest rates and, by transferring a large chunk of its resources to the State Exchequer, it has provided some more fiscal space to the Central Government. It is important that the intentions of the RBI and the Government translate into more economic activity through banks and financial institutions.Along with money, confidence also has to be instilled. Excessive focus on NPAs in the past few years, treating NPAs virtually as criminal offences committed by individual officers of banks and indiscriminate use of investigative agencies have lowered the morale of bank officers as well as government officers. Growth cannot take place in an atmosphere of extreme fear.

In the final analysis, the Central Government has to be clear about its immediate objective. The focus has to be on growth and revival. Maintaining fiscal deficit at levels laid down for Western economies and control of inflation cannot be the prime objectives of government in a faltering economy. And the Centre has to take the lead in bringing together the nation as one and be open to suggestions from all.


The views and facts expressed in the article are those of the writer.