No Time for Hand Wringing as India's Economy Slows to 6-Yr Low; Reforms & Fiscal Stimulus Way Forward
The biggest villain in the worsening growth story in Q1 has been a fall in private final consumption. People are not buying nearly enough soaps, shampoos or hair oils, cars or SUVs, biscuits or even potato chips.
Representative image (Reuters)
A senior government official warned against “hand wringing” and “messages of despair” as the Opposition, led by the Congress, criticised the government for its handling of a slowing economy.
Within hours of the record low Q1 GDP numbers coming in, a political war of words had broken out. According to government data, growth in the first quarter (April-June 2019) crashed to a six-year low of 5%. This number is much lower than what analysts and market watchers had been anticipating — anywhere between 5.6-5.7% — and a full 80 basis points (0.8 percentage points) lower than even the immediate preceding quarter, which itself was a 20-quarter low.
The previous low GDP number was 4.9% in Q1 of 2012-13 and it stood at a respectable 8% in the Q1 of 2018-19. The government tried to deflect criticism over its handling of the economy while hashtags such as #bahikhatemeinlocha became popular on Twitter.
Bibek Debroy, chairman of the PM’s Economic Advisory Council, said in a statement that “those who seek to spread a message of gloom and doom are doing a great disservice. The EAC-PM does not endorse such views. While constructive criticism and suggestions are welcome, a message of despair and hand-wringing is best avoided.”
He said he expected real growth in 2019-20 to be around 6.5%.
According to government data, the biggest villain in the worsening India growth story in Q1 (April-June 2019) has been a fall in private final consumption. People are not buying nearly enough soaps, shampoos or hair oils, cars or SUVs, biscuits or even potato chips. And this is true of both, urban markets as well India’s hinterland. Manufacturing growth has been flat (0.6% over a high base) while agriculture growth has improved to 2% from being negative in Q4 of 2018-19.
On flat manufacturing growth, Praveen Chakravart, data analyst with the Congress, tweeted: “Make in India launched in 2014. India’s manufacturing growth turned negative in June 2017 quarter, for the first time. In Jun 2019 quarter, manufacturing growth is almost zero (0.6%), second lowest in seven years. Meantime, imports from China have doubled from 2014 to 2019 (sic).”
Last week, Finance Minister Nirmala Sitharaman announced a slew of measures to kick-start economic growth and on Friday evening, she announced the merger of 10 public sector banks to create four stronger banks as India marches down the $5 trillion economy path. The measures announced last week will go some way in mitigating liquidity stress besides helping the automobile sector and ensuring better credit flow in the system while also providing a minimal boost to the stock markets. But they do not involve any significant fiscal intervention.
Analysts at Kotak Research had noted earlier that the government (in its announcements last week) did not provide any fiscal stimulus either through broad-based tax cuts or industry-specific GST rate cuts despite such demands by industry.
“The government has perhaps no capacity to provide fiscal stimuli given faltering tax revenues. It has provided some tax incentives, which should be marginally positive for CV (commercial vehicle) demand. Also, decent monsoons may help revive rural demand although the automobile industry can help boost demand by reducing prices; it has enough scope to do so.”
But by the beginning of the week, the government was on an even weaker footing than before in its reluctance to offer any fiscal stimulus, since the RBI decided to transfer a whopping Rs 1.76 lakh crore to its coffers — an amount which is higher than even what the government itself had budgeted for. Despite this record amount coming in from the RBI, the government has remained silent on a stimulus.
And the RBI has also exhorted the government to shed its reforms phobia. In its latest annual report, the central bank has said, “Reviving consumption demand and private investment has assumed the highest priority in 2019-20. This may involve strengthening the banking and non-banking sectors, a big push for spending on infrastructure and implementation of much needed structural reforms in the areas of labour laws, taxation, and other legal reforms, which will also enhance ease of doing business in pursuit of fulfilling the vision of India becoming a US$ 5 trillion economy by 2024-25.”
Analysts at India Ratings said in a note that both, structural and cyclical issues, are plaguing the Indian economy and to bring it back to a respectable growth path, short-term and long term measures are required. Declining savings, especially household savings, are a major challenge and are leading to a structural growth slowdown.
“While the fiscal space to undertake counter cyclical measures are very limited, we believe the government would undertake some measures to provide short-term boost to the economy. After agriculture real estate/construction is the second largest employer and also has the huge backward and forward linkages with other sectors. So reviving real estate sector will be crucial both from the investment as well as consumption point of view.”
“The measures announced so far indicate that the government is taking steps to mitigate the difficulties faced by the economy but these measures will play out only in the medium-term. Ind-Ra believes there is no quick fix solution to the downturn which has been in the making for past few years. Hence, the recovery will also take its own time but government and hasten the recovery by implementing the announced measures quickly and adding few more which could address both cyclical and structural issues. Ind-Ra expects at least one more rate cut by RBI to boost demand.”
As for bank mergers, this decision would strengthen the weak balance sheets of PSBs and ultimately create much better credit flow but the mergers are unlikely to result in any immediate boost to economic activity.
Analysts at CARE Ratings noted government’s recent measures to boost investor confidence and indications of frontloading of the capital expenditure to provide an additional boost to the economy. Also, the RBI has lowered policy rates by 110 bps (1.1 percentage point) to support the slowing economic growth.
“The second half of the year is expected to see some pickup in demand with the festive season and favourable monsoons so far this year could lead to improved rural income. These measures and seasonal factors are likely to revive the growth going forward.” CARE has pegged GDP growth for fiscal 2020 at 6.7- 6.8%.
(Author is a senior journalist. Views are personal)
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