Taking pride in the landmark decision of revoking
Article 370 and Article 35-A of the Constitution, on 8th September 2019,
Modi government 2.0 completed 100 days in office. While it was a day of
celebration, the lurking slowdown in GDP growth haunted the tall promises of
making India a $5 trillion economy by 2024, which grew at the rate of 5% in the
quarter ended June’19, slowest in more than 6 years. FY19 was particularly
a year of recovery. A year dedicated to trying to pull the economy out of the
quagmire it got into from the aftershocks of demonetization, disruption by GST,
untoward unleash of closeted NPAs and the recent liquidity crisis.
A couple of weeks back, Chief Economic Adviser (CEA)
to the Finance Minister, Krishnamurthy Subramanian, said that the Indian
economy does not need a fiscal stimulus to tackle the ongoing economic
slowdown. Comparing the corporate sector to a grownup, he added, an adult
cannot keep asking his father for help and live with the idea of personalizing
profits and socializing losses.
Days after such disheartening comments from CEA, the
government finally came out of the state of denial and took cognizance of
consumption slowdown, squeezed liquidity, tepid employment and decelerating
exports; and the dire need for fiscal stimulus.
Hence the immediate focus of the government should be
on improving the liquidity in the economy and generating employment, which in
turn will help to boost consumption. Because India, no matter how hard we
find it to believe, is a consumption led economy and not investment led. Government
will need to let go of its obsession of maintaining the twin deficit – Fiscal
deficit and Current Account deficit in check, which in effect, unfortunately,
is pushing the economy into a liquidity squeeze. There’s an immediate need of
quantitative easing rather than fiscal consolidation, government should open up
its kitty and pump in money into the economy for the broken wheel of
consumption to move again.
Paraphrasing one of the most
astute value investors of India, Basant Maheshwari, no matter if we are the
best cardiologist in the city with top notch medical paraphernalia, if the
patient is dying of a heart attack in an emergency room and we don’t reach on
time, notwithstanding our repute, everything goes for a toss.
Auto industry, which is a symptomatic proxy of GDP
growth & sentiments in economy, is facing its worst crisis in 20
years. Venerable FM Nirmala Sitharaman, in a recent announcement did clear the
air around government’s support to the sector by assuring that the decreased
interest rates would lead to demand generation, but the volume figures of the
industry is concerning. To make the auto industry row through the rough waters,
there’s a pressing need to lower down GST on automobiles.
The impact of tight liquidity has started to hamper
the consumption. The domestic private consumption, which makes 60% of GDP,
is slowing down. Britannia which almost always grew at the rate of nominal GDP,
north of 12%, has grown at only 6% in the last quarter. That basically says
people have stopped buying enough biscuits.
Rural demand was poised to grow at least 1.5 times
that of the urban on the back of good agricultural produce and government’s
push on doubling farmer’s income by 2022. But in-check inflation has marred the
requisite increase in food prices which could have helped increase farm income.
Low food prices have also resulted in lower wages and in turn reduced the
spending power in the agricultural economy which engages almost half of the
total labour force and generates only about 17 percent of gross value added
with an annual average growth of about 3.1 per cent. The government will now be
in conundrum of increasing the food inflation to a level which aids farm
economy without increasing systemic inflation in the economy, as the RBI
pointed out in its latest annual report.
Industrial output and its main
component—manufacturing— are clearly not benefiting from the “make in India”
campaign, which has far reaching effects on employment and income generation in
both rural and urban areas. Government will need to focus on projects which are
not only profitable but also has high staff cost per worker in order to infuse
more disposable income in worker’s hands.
Following the classic story of the union of the blind
and the lame, Government recently declared mega-merger of multiple PSU banks
into a handful of anchor banks aimed at improving operating efficiency,
governance, accountability and facilitate effective monitoring of consolidated
NPAs. While the merger will inadvertently result in loss of succinctness and
coherence in the short run, government focus will be on expediting merger so as
to help fuel the consumption by pumping in money to the right sectors of the
economy immediately by leveraging the extensive network of branches that the
PSU banks have.
Increased government spending and eased monetary
policies can only resurrect the corpse of 8%-growth-economy in order to reach
the goal of $5 trillion economy. While we are far from what US faced in 2008,
we could be better off if we follow their recovery path sooner than later.
Government should focus on saving the economy from hitting the rock bottom by
decreasing the taxes (either by reducing corporate taxes or lowering down GST
rates in struggling sectors) and increasing government spending to increase
national income and to stave off liquidity crisis which will bolster private
capital expenditure and private spending leading to consumption - stimulating
economic recovery.
This government is beginning a new chapter from an old
end. Modi government's didactic decisions in its second term are indeed
commendable. However, exemplary diplomacy and socio-political consistency help
very little in stabilizing the economy.
Nonetheless, in all optimism, if they do, what they say they will, India will be a $5 trillion economy by 2024 after all. But wait, who are we kidding?
Nonetheless, in all optimism, if they do, what they say they will, India will be a $5 trillion economy by 2024 after all. But wait, who are we kidding?