Expert Opinion  ^{123    15}   

Published: Aug 29, 2019
Updated: Aug 29, 2019

Economy in desperate need of stimulus

India is finally conceding that her economy is in trouble. The country’s gross domestic product (GDP) in the April-June quarter of 2019 grew at a meagre 5%, the lowest in six years. This is a steep fall from the roughly 8% growth clocked in the same period about two years ago. It is rather alarming that even this 5% growth is an overestimation, given the many infirmities in India’s revised GDP estimation methodology introduced four years ago.

The base year change impact made us believe that “all is well with India’s economy”. The absolute GDP in the base-year (2011-12) contracted 2.3%, while annual growth rates in the following years increased substantially. For 2013-14, GDP by the new series grew at 6.8% compared with 4.2% in the old series. The growth in manufacturing moved from -0.7% to +5.3%. However, such wild swings attracted widespread suspicion, considering that it was not in line with other economic correlates such as bank credit growth and industrial capacity utilisation.

In a time-series econometric exercise using official quarterly GDP data, the average annual growth rate between 2012-13 and 2016-17 may be 4.5%-5%, as against the official estimate of over 7%. But in reality, India’s GDP may now be growing at a much slower rate than the official 5%, probably somewhere between 3% and 4.5%.

Fire-Fighting

According to Rajiv Kumar, the head of NITI Aayog, the current slowdown was unprecedented in 70 years of independent India; he has advocated immediate policy interventions in specific industries. However, the Chief Economic Adviser, K Subramanian, disagreed with the idea of industry-specific incentives, and instead has argued for structural reforms in land and labour markets. Simultaneously, many experts are resorting to social media and opinion editorials to counter one another. In essence, the contention among the members of the economic team of the government is about the gravity of the current economic crisis rather than whether or not India is facing an economic slowdown.

Private sector investment, the mainstay of sustainable growth in any economy, is at a 15-year low. In other words, the private sector has almost not invested anything in new projects.

The situation is so bad that many Indian industrialists have complained loudly about the state of the economy and the distrust of the government towards businesses.

For all the hype about the ‘Make in India’ programme, hailed as the harbinger of the country’s emergence as a manufacturing power, India’s dependence on China for goods has only doubled in the past five years. India’s imports from China is an equivalent of Rs. 6,000 ($83/£68) worth of goods for every Indian, which is double that in 2014. India’s exports have remained stuck at 2011 levels and not grown. Thus, it can be said that India is neither making goods for itself nor for the world.

Measures such as ornamental tax///??? and other fiscal incentives to specific industries are neither going to bring about sudden competitiveness in Indian manufacturers, nor stop India’s addiction for affordable Chinese goods. If anything, the trade spat between China and the United States has only benefited countries like Vietnam and Bangladesh, not India.

When millions of Indians started to lose their jobs and rural wages remained stagnant, consumption was affected and brought about a sharp slowdown in the economy. To address the muchdiscussed rural distress prevailing now, government spending has to be re-invigorated to revive rural capital formation and employment generation. For mitigating the rural and urban distress, the government must steer investment growth until the private sector’s animal spirits are back. Indian industry will invest more only when demand for goods and services increases, which will happen only when wages increase or there is money in the hands of the people. So, the only immediate solution for India seems to be the boosting of consumption through a stimulus given directly to people, in the classical Keynesian mould. However, there should be a combination of both stimulus and adequate reforms to boost business morale and confidence.

(Dr. V. V. L. N. Sastry is a jurist and financial economist)