Indian economy is currently experiencing one of its kind recession the reason for which cannot be easily diagnosed that has apparently resulted in loss of thousands of jobs. On 6th December, 2019, data for the second quarter (Q2) of ongoing fiscal was released by Government, which on the line of expectation showed a dimming glow. Economy grew at marginal 4.5 percent in second quarter and at 5% in the first quarter. Fiscal deficit in the first seven months through October stood at Rs. 7.2 lakh crore or 102.4% of the budgeted target for the fiscal. The core industrial growth stood at –(5.8) percent (which still demanded a proper explanation for such an abrupt fall) and a fall was recorded in gross value added to 4.9%, as against 6.9% in the same quarter last year.
“Economic growth may have slowed but there is no recession, there can be no recession”, said finance minister Nirmala Sitharaman, in context of Q2 data, but having a glance on the mentioned data, did not provide much room for optimism, it seems satirical remark in this contemporary situation. If not, then surely we are midway or along the way towards the same.
Looking for reason for this economic crisis-
There can be multiple factors behind this crisis, but broadly it could be summed up in the following five points:-
• Demonetization: At the time of its implementation, approximately 98% of the population was in support of this, but our former Prime Minister Dr. Manmohan Singh and some economist could sense the coming consequences and foretold that GDP is likely to get a setback of 2% and results are very much in front of us.
After its implementation, there was a fall by 60% in corporate investment, which was lowest in decade according to a report.
• GST: It was one of the much awaited reforms intended to unify and simplify the tax system, and its successful and smooth implementation in 160 countries could be cited as perfect example. But, the way of its implementation in our country was very complex and complicated. The fate of GST in India is still hanging on a political see-saw. Inadequate collections from GST are evidence of that and India is yet to see its share of development around GST.
• Unemployment: Jobless growth is another critical problem which needs to be effectively redressed. According to labor ministry data, current unemployment rate is 45 years high, the rural growth has plunged from 14.6% in FY14 to 1.1% in FY19.
• Bank frauds: There has been a significant increase in bank frauds by 74% to Rs. 71,543 Cr in bank frauds in the FY19, according to RBI annual report. Moreover, loan of public sector banks for 2014-17 to the tune of Rs. 2.4 lakh crore was written off by government owing to non-payment.
Now moving a mile further from ‘why’ next question that triggers our attention is ‘how long will it take, for us to reach the expected trajectory of reaching two digit GDP growth? How long will this struggle continue? And what could be possible remedies to give a kick-start to this turtle-paced creeping economy and to accelerate recovery again?
On the part of government.
Since the past few months, it seems government has tried and is still working on it to avert the crisis and help our economy to get back into the game. For that its major steps included:-
For boosting investment it incorporated measures like support to real estate, credit expansion, corporate tax reductions and bank recapitalization.
For expansion in infrastructure, it conducted a substantial outreach programs in 374 districts across the country to improve credit delivery, especially for critical sectors like MSMEs, NBFCs retail and agriculture sectors. Eventually, total of Rs 2.2 lakh crores to corporate and Rs 72,985 crores to MSMES have been lent-out by PSU banks.
Besides, government planned strategic sale of state-run airline Air India and oil refinery and marketer Bharat Petroleum Corporations(BPCL) to make up for the revenue (to meet its expected disinvestment target of 1 lakh crore), in the year when tax collections are under pressure.
In addition to above, it also included steps like streamlining GST and direct tax reforms, and pursuing business friendly policies.
In September, 2019, the corporate tax rate was slashed to 22% from 30% to give a adrenaline shot to the sluggish economy. Apart from this, in the much awaited and forthcoming union budget of 2020, hopes are high that there might be a reduction in the personal income tax rates, to provide relief to individual tax payers, thereby resulting in increase in personal disposable incomes (thus lifting demand and consumption in economy). But it has its own complications and implications as a major part of fund was lost in the form of revenue foregone by the way of reductions in corporate tax (approximately 1.45 lakh crore). So it might prove to be a major challenge before the government to strike a balance between expectation of people and resources at its disposal.
How RBI can help economy to get out of this coma?
RBI’s decision to keep repo rate unchanged for the sixth time seems to have grabbed our attention and raised curiosity. It appears that commercial banks lending rates have turned so much immune to the RBI’s lending rates that five subsequent cut in the benchmark price ( by 135 basis point, to its lowest since 2010) hardly made much difference. However, decision somehow made sense as the inflation rate in November and December were much higher than the expectation. Amid rising tension between Iran and USA, the chances of rise in oil prices are also high. Thus chances of revival through further rate cut seem far from the reality. Besides, RBI announced simultaneous purchase and sale of government securities of Rs. 10000 cr each under open market operations after review of current liquidity, market situations and an assessment of the evolving financial conditions. The aim of such program is two-fold i.e. to influence the long term interest rates and secondly, to provide a boost to business and industries and eventually to the economy by making cost of capital cheaper.
Niti aayog presents a road-map/rectification measures ahead:- To tackle this problem and to accomplish its target of $5trillion economy in the medium term-
I. India’s government-debt to GDP gap needs to be reduced further, although some decline has been perceived.
II. In reference to exports, NITI aayog said that India needed more inclination towards exporting high-end technology and high value manufacturing goods.
III. On agriculture, it proposed urgent structural reforms. Furthermore, market distortion was a major pulling down de-facto factor of GDP growth, and states should quickly take on the act of conclusive land tilling.
IV. However owing to numerous reforms, India’s ranking in Ease of Doing Business has improved like never before in past 5 years, but it is still advisable to take measures to better the ranking.
V. For railways, it said low investments in past along with high freight tariffs and low passenger charges needed a reassessment.
VI. In regard to banks, it said that credit squeeze by banks has reduced the ability of the banks to maintain a robust growth rate due to high non- performing assets in heavy industries. Most affected ones are MSMEs, retail and agriculture sectors.
For us to fulfill our mission of $3 trillion in short run and $5 trillion in the medium run India needs a concrete roadmap ahead. It calls for the deliberations and dutifulness and for that to happen, government should focus more stimulation on the demand side of the problem and focus more on inclusive growth. While it is easy to criticize others, policy making is a tough job that requires the intellectuals with a proper understanding of the issues and must be backed by reasons and implement a sound strategy in a sustainable manner. In a recent interview with PTI, IMF chief economist Gita Gopinath expressed her astounding reaction on the current economic condition and recommended that Indian government should focus on structure, promote productivity growth, and along with infrastructure investments priority should be to create more and better jobs for Indian youth and rapidly growing labor-force. The forthcoming union budget imbibes answers to many questions with regards to definitive assessment of how deep this slow-down is and further steps needed to pull economy out of it.
(Writer is a graduation student of University of Allahabad and Member of Finance and Economics Think Council)