As the Ministry of Statistics released the quarterly data on Indian economy on the evening of 31st May, it became a sort of validation of the news channel debates and newspaper editorials that were beset with arguments for a slowdown of the economy.
The statistics show that India is no more the fastest growing economy in the world as the quarterly data on GDP shows it growing less than 6% at 5.8%, which is lesser than China’s growth of 6.4%.
Rising unemployment has also been a subject of discussion, debate and worry. The government that had come to power with a promise of creating 2 crore jobs per year, was bitterly criticised for not only failing to fulfil its promise but to contribute to worsening of the same, by some bold but controversial policy actions.
However, the citizens of the largest democracy in the world did not doubt the good intentions of one of the most revered leaders of the world, Mr. Narendra Modi. Thus, the government started its second term (Modi 2.0) formally with the new government; a jumbo team of 58 ministers, taking oath on May 30th 2019.
In the second tenure of the government, there are many challenges to face, especially on the economic front. As the economic growth is getting derailed, there is a need for urgent policy action. Keynesian prescription calls for economic stimulus, meaning that government should increase government expenditure to encourage private businesses to do the same. Fiscal stimulus in form of government expenditure cannot be ruled out because in an economy which is slowing down, private investment will not be forthcoming easily.
Then again, there is not much fiscal space for the government, as the recently released figures show that government has just been able to stay on the target of 3.4%. Constrained by modalities of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, the government cannot let Fiscal Deficit continue to climb unabatedly.
The figures of the other components of GDP – Consumption and Private Investment have not been encouraging recently. Private consumption expenditure as a percentage of GDP fell from 56.6 % in 2013-14 to 55.7% in 2017-18) Whereas, the Public investment of Rs. 738.4 billion in the last quarter ended in March shows a nearly 62 % decline from the last year. Similarly, the Gross Fixed Capital Formation to GDP ratio showed a very minor increase from 31.1% in 2016-17 to 31.4% in 2017-18.
Besides, several other trends hint at a sluggish demand in both rural and urban sector like declines sales of two-wheelers and four wheelers, declines in air passenger traffic, decline of growth in private final consumption (it grew at 7.2% in Q4 as compared to 8.3% in Q3), continuous decline in deployment of bank credit to the industrial sector, FMCG giants like ITC and HUL talking of sluggish demand in the farm sector etc.
Though, the challenges galore, it is the government’s leader who has never shied away from taking tough, unpopular decisions in favour of the nation. Modi 2.0 has to be lauded for the incredible speed at which it has started the task of fulfilling it’s poll promises. The decisions taken by the government for rural distress – which is widening the scope of PM Kisan Yojana or the PM Kisan Samman Nidhi Yojana to include all farmers, instead of limiting it to farmers with less than 2 hectares of land. Now, all farmers (around 14.5 crore beneficiaries) would be availing Rs.6000 per year cash subsidy that would cost the central government exchequer, an estimated Rs. 87,217.50 crores each year.
The government has also been committed to ensure income support to people in the unorganised sector through the contributory pension schemes for marginal farmers and retail traders, shopkeepers and other categories of self –employed people. Such pension schemes will be open for people in 18-40 age group and contributions from both sides (beneficiary and government) would range between Rs. 55 -100; thus, ensuring a pension of Rs. 3000 after the age of 60 years.
Also, the government’s swift decision of constituting two Cabinet Committees – One with focus on employment and jobs while the other with focus on skills and employment; is again reflective of its commitment towards various reforms that would be needed to speed up creation of jobs, boost manufacturing and investment and increase the growth rate with controlled inflation.
While the measures like extending ‘PM Kisan Yojana’ and instituting new schemes of pension for people in the unorganised sector shall work as a stimulus for rural demand and mitigate rural distress in some way; however, several other reforms will be needed to encourage rural and urban demand; that is falling if we look at the consumption figures.
When it comes to encouraging economic growth, both fiscal and monetary policy are used in a way that they complement each other. Hence, as expected, the Reserve Bank of India has supported the government’s efforts to reverse the economic slowdown by reducing the repo rate by 25 basis points on 6th June. Also, it changed the monetary policy stance from ‘Neutral’ to ‘Accommodative’. When the banks reduce their lending rates on various types of loans including personal, education and home loans, it would create fresh demand in the economy. However, as experts point out, this easing of monetary policy stance by RBI will make a difference only when the benefit of rat cut by RBI is passed to customers through the commercial banks, i.e the monetary policy transmission mechanism must be effective.
Effective monetary policy transmission basically means that all interest rates, especially the lending rates of banks, in the economy should move in tandem. In order to ensure that rate cut by RBI is transmitted, it is essential that banks are infused with adequate liquidity. However, till now RBI doesn’t seem to be taking adequate measures to ensure the same. With a looming crisis on the banking sector, especially the Non- Banking Financial Companies (NBFCs) that are facing a severe liquidity crisis; the banks and financial companies are scared to reduce the deposit rates. Thus, the marginal cost of lending does not come down enough to enable the banks to transfer benefit of lowered repo rate to customers.
The RBI should at-least exercise its power of ‘moral suasion’ to ensure that banks cut down their lending rates so that the monetary policy becomes effective in impacting demand. The government too, should advise the RBI to act fast on the liquidity crisis.
The other policy reform measures that Modi 2.0 must immediately start are – plugging of leakages in the form of wasteful expenditures in the government and increasing generation of non-tax revenues so that the inflows and outflows of government money are better managed. Also, MSMEs need urgent and affirmative action to revive them as ‘job boosters’. MSME sector should be seen as an opportunity by the banks and catered to with innovative measures.
‘Make in India’ scheme should be strengthened further so that India jobs are generated in manufacturing. For this to happen, we need land reforms, rationalisation of tax structure for corporates through simplification of GST.
A little window of opportunity also exists for Indian firms to step up their exports to China, in view of strained trade relations between US and China. Though, there are non-tariff barriers to our products but an attempt must be made to tilt the situation in our favour through diplomatic relations, both with US and China.
With a capable person like Shri Jaishankar, who has been hand-picked by PM Modi to lead the Foreign Affairs, we can surely expect positive outcomes in this regard. While countrymen are assured of the strong leadership at the Centre, we need to only ensure swift and smooth implementation of the reforms agenda. All eyes are now on the most powerful woman in India, the Finance Minister – Ms. Nirmala Sitharaman.
