Current slowdown a cyclical downswing: RBI

The recent deceleration in the economy could be in the nature of a soft patch mutating into a cyclical downswing, rather than a deep structural slowdown, according to the Reserve Bank of India’s annual report for 2018-19.

RBI’s disaggregated analysis confirms that a broad-based cyclical downturn is underway in several sectors – manufacturing; trade, hotels, transport, communication and broadcasting; construction; and agriculture.

The central bank also said there are still structural issues in land, labour, agricultural marketing and the like, which need to be addressed.

When it comes to determining the policy responses, the RBI observed that illustratively, a soft patch can be looked through, while a cyclical downswing will warrant counter-cyclical actions in terms of monetary and fiscal policies, but a structural slowdown will need deep-seated reforms.

As per the report, half way through the financial year 2019-20, several uncertainties weigh on the near-term outlook for the global economy and India. The macroeconomic environment remains unsettled and financial markets are experiencing considerable flux as the financial year 2019-20 progresses.

The central bank underscored that the deceleration in industrial output and its main component – manufacturing – to below 4 per cent during 2012-19 has larger consequences in terms of employment and income generation in both rural and urban areas.

“While the persisting weakness in capital goods production has evoked concerns about the investment slowdown, a source of worry is the subdued performance of consumer non-durables as well. In coincident movements, sales of leading consumer goods companies have slumped, and volume growth of FMCG products has fallen to single digit rates.

“Clearly, rural demand has been sapped by weaker harvests in 2018-19 relative to preceding years, and depressed crop prices. This has brought forward concerns about consumption joining investment in the overall slowdown, which is worrisome as consumption accounts for 57 per cent of GDP. This challenge naturally ascends the hierarchy of policy priorities,” the report said.

What ails animal spirits?

Currently, the capex (capital expenditure) cycle remains muted, with firms preferring to intensely utilise existing capacity to meet demand rather than expand it. The downslide in sales growth of manufacturing companies is impacting sentiments, the RBI said.

“What ails the animal spirits? At the core is the issue of domestic demand. And what should be the policy focus?

"Continuing focus on improving ease of doing business; reforms in factors of production -- land and labour; capitalising on opportunities opened up by the heightened trade tensions; and faster implementation of capital expenditures by public authorities, and similar other measures have the potential to inject growth impulses into the economy,” the central bank reasoned.

The RBI recommended that going forward fiscal readjustments to boost growth without accumulating public debt warrant improvement in spending for infrastructure and the social sector, given the high capital expenditure multiplier.

On the revenue side, tapping the full potential of GST (goods and service tax) and digitisation, coupled with renewed efforts towards improving ease of compliance may help open up room for reduction of tax rates where possible, while maintaining revenue neutrality.

The RBI assessed that reviving consumption demand and private investment has assumed the highest priority in 2019-20.

This may involve strengthening the banking and non-banking sectors, a big push for spending on infrastructure and implementation of much needed structural reforms in the areas of labour laws, taxation, and other legal reforms, which will also enhance ease of doing business in pursuit of fulfilling the vision of India becoming a $5 trillion economy by 2024-25.