NEW DELHI : On Friday, the Union finance ministry called a press briefing at New Delhi’s National Media Centre on short notice, where finance minister Nirmala Sitharaman presented the first instalment of the government’s plan of action to revive the economy and build investor confidence, in a 32-slide PowerPoint presentation.
Beyond the measures announced in the press conference and their effectiveness, it was an acknowledgment by the government that the Indian economy has entered its worst phase since the 2008 global financial crisis and, hence, needs urgent attention.
While the quarterly gross domestic product (GDP) data suggests that the economy slowed to a five-year low of 5.8% in the March quarter, indicating the structural aspect of the slowdown, a slew of high-frequency indicators have been pointing towards a sharp cyclical slowdown in demand, both in rural and urban India, complicating policy choices . Passenger vehicle sales contracted for the ninth consecutive month in July, while rural wages show no signs of a recovery.
How we reached here
Rural growth had remained high during the 2004-12 period, propelling overall economic growth. The problem started with the reversal of rural growth in 2013-14. Global food prices came down, while the Reserve Bank of India (RBI) still maintained a restrictive monetary policy.
After 2014, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which assures 100 days of manual work a year to at least one member of every village household, became resource-driven rather than demand-driven.
Less focus on MGNREGS, especially during the two drought years of 2014-15 and 2015-16, worsened the rural demand situation and dampened rural growth. While growth was slowing, two back-to-back structural changes, the withdrawal of high-value banknotes and the implementation of goods and services tax, gave a body blow to the unorganized and organized sectors, respectively.
While the Modi government inherited many of its current problems, including the mounting non-performing assets (NPAs) of public sector banks, it has to be faulted for not diagnosing the problems properly and adding to the woes through demonetization and the flawed implementation of GST.
In an interview with Mint earlier this month, Arvind Virmani, former chief economic adviser in the finance ministry, said one may think government does good things by catching black money operators and driving them into jail, but it has effects on the economy. “I don’t believe a purely danda (stick) type approach can ever be sustained in India because corruption is endemic in the system,” he added.
The Way ahead
After Sitharaman announced the package, Kerala finance minister Thomas Isaac tweeted: “Mini budget announcements will not provide much needed stimulus to reverse the slowdown. Crisis is not because of decline in ease of doing business or sops for automakers. Bank recapitalisation had already been announced. What is required is a large fiscal spending package.”
While the clamour for a fiscal stimulus with additional government expenditure has been growing, with industry lobby Assocham suggesting a ₹1 trillion fiscal package, the Narendra Modi government has been fiscally conservative and reluctant to roll out a stimulus package like the Congress government did in 2008 after the global financial crisis.
Pronab Sen, former chief statistician of India, said there is space for fiscal stimulus. “The question is how you go about it. On the expenditure side, the government can get more bang for the buck out of a little bit of reallocation from projects, which are relatively long gestation, to projects which can turned around quickly,” he added.
The RBI’s ₹1.76 trillion bounty after accepting the recommendations of the Bimal Jalan panel comes as a shot in the arm for the government. However, analysts believe given the precarious revenue situation with questionable budget math, any temptation to use this towards a ‘fiscal stimulus’ risks regenerating worries around the quality and effectiveness towards meeting the deficit targets of 3.3% of GDP. “From a budget standpoint, the extra ‘windfall’ owing to the Jalan committee is ₹58,000 crore. Given the expected revenue shortfall in a slowing economy and, especially vis-à-vis the aggressive assumptions in the budget, it would be prudent to keep this amount in order to meet the budget numbers more credibly,” said Suyash Choudhary, head of fixed income, IDFC AMC.