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Insights into Editorial: Key steps to kick-starting the economy

Insights into Editorial: Key steps to kick-starting the economy

Reversing The Slowdoen


Current status of the Economy:

From the level of 8.1% in the fourth quarter of 2017-18, quarterly GDP growth fell to 4.5% in the second quarter of 2019-20, a fall of 3.6 percentage points.

This steady decline must have had an adverse impact on employment and poverty reduction.

With recession, job loss and companies winding up operations, 2019 has proved to be a bad year for India’s economy.

The GDP growth rate for the second quarter dropped to its lowest in six years.

Gross Domestic Product figures released by the Central Statistics Office (CSO) showed that India’s GDP for the second quarter of the financial year 2019 (Jul-Sep 19) was 4.5 – lowest since 2012-13.

Why this economic slowdown is serious?

Let see in example:

Every single purchase by her begins a chain of purchase and sale. The kiranawallah goes to wholesale market to buy stuff for shop.

The wholesale market sources its supplies from the farmers, who purchase seeds, fertilisers, tractors, diesel and employ labourers on their fields. All are paid in money.

This is repeated for every single purchase by your neighbour. She ensures flow of money that defines growth of measurable GDP.

This chain of sale and purchase has shown signs of slowdown over the past few months. It is visible in almost every sector of the Indian economy. The result was worrisome for 2018-19, for which the GDP growth rate was 6.8 per cent.

Present Banking situation:

  • The present economic situation, in a sense, has become more complicated because of the poor health of the financial system.
  • An excessive expansion of credit in the earlier years combined with the slowdown have contributed to a rise in non-performing loans in the banking system.
  • Had the banking system been healthy, it could have been used as a lever for stimulating the economy.
  • On the other hand, the banking system, currently, has become a burden. Quickening of the resolution process along with the recapitalisation of public sector banks has to take priority.
  • The cleansing of the financial system which also includes finding solutions to the problems of non-banking financial companies will help to push the economy up. In a sense, this is our “2008-09 crisis”.

Corrections done from RBI side to boost Economy: Monetary policy review:

Monetary policy has done its role by reducing the Repo rate by 135 percentage points since February 2019 to date.

Monetary policy generally is more effective in controlling inflation than stimulating an economy.

Banks have not followed suit fully due to the high level of non-performing assets. While the Reserve Bank of India (RBI) can play a supportive role in expanding liquidity, we must understand the limitations.

In the present context of the banking situation, the RBI’s role that is even more important than pure monetary policy will be to quicken the resolution process of bad loans and help banks to move to a more healthy situation. The task is not that easy.

Government’s hands tied:

  • Market-based economies thrive on hope and belief of profit by private entrepreneurs. When market sulks under negative sentiments in the market, the government infuses money to bring back hope. But the central government’s hands are tied.
  • In India, the government expenditure accounts for around 10 per cent in the economy.
  • With the government sensing an economic slowdown, it increased expenditure by 19 per cent in 2017-18 and 13 per cent in 2018-19. This was the highest increase in government expenditure since 2008 financial meltdown.
  • To do a repeat, the government needs more money. But revenue collection is moderate for April-June quarter — at Rs 4 lakh crore registering a growth of less than 1.5 per cent.
  • To put in perspective, the gross tax collection growth for April-June 2018 was over 22 per cent. Simply put, the government does not have enough money to invest in the economy.

Conclusion: Will 2020 be better? What can be done to make it better?

It is not much solace to say that 2020 will be better than 2019.

The reasonably good monsoon may lead to an improvement in agricultural production and rural demand.

Exports can help a bit if there is strong effort and if the global trade environment improves.

Increased government expenditure, particularly in capital expenditures, is one intervention which is very much needed.

Private investment can pick up provided the growth rate begins to look up.

Restoring financial institutions banking and non-banking to a healthy state when they can begin to lend confidently is the most essential prerequisite for faster growth.

Way Forward for Government:

Given the revenue trend, the Central Government may not find it easy to increase its capital expenditures relative to GDP.

In this context, one critical question that is under debate is whether the present situation warrants a breach in fiscal deficit norms.

It may be recalled that against the background of the international financial crisis of 2008, the fiscal deficit of the Government of India was raised to 6.0% in 2008-09 and it went up to 6.5% in 2009-10.

While this extraordinary increase led to the growth rate rising immediately, it landed us in problems later on.

However, a modest breach in fiscal deficit may be acceptable. This is not to ignore the concern that the fiscal deficit indicated by the Budget is always lower than the “true” or “actual” fiscal deficit. That problem might still continue.

A focused increase in capital expenditures of the Government and the Central public sector undertakings (PSUs) may help to apply the brakes on the slowdown. It might also help to “crowd in” private investment.

Reform of the Goods and Services Tax (GST) is very much needed.

We need a relook at the commodities falling under various slabs.

Perhaps in an effort to get the GST through, a lot more of commodities were pushed under the lower slabs.

Detailed data on GST collections are not available in the public domain to be able to take a view on this.

Reforms in this direction may perhaps have to wait till the economy turns around. The GST has to become more manufacturer and trader friendly.