With first quarter GDP growth at a three-year low of 5.7 per cent, the economy may well end up growing at barely 7 per cent in 2017-18. This seems a particularly underwhelming performance in a year of good monsoon and benign commodity prices. A combination of factors seem to have caused this slowdown — of these, the ‘demonetisation effect’ cannot be easily dismissed. Although growth in the third quarter of 2016-17, at 7.3 per cent, confounded economy observers, the figures for the next two quarters have been unflattering. If demonetisation impacted the informal sector and agriculture in particular in unanticipated ways, the introduction of GST on July 1 sent ripples across industry as a whole. Although adjusting to GST should be seen as a short-term shock, its effects are clearly visible in the Q1 figures, with gross value added in manufacturing up just 1.2 per cent. However, growth has seen a steady decline since the second quarter of 2016-17, which suggests that other factors are at work. Principal among these, as Economic Survey 2016-17 points out, is the mounting debt of corporates holding up investment and lending with the declining profitability of the power and communications sectors worsening the ‘twin balance sheet’ problem. Besides, “stressed farm revenues, as non-cereal foodgrain prices have fallen sharply” have compressed demand, with “fiscal tightening by the states to keep budget deficits on track” adding to the problem. Agriculture growth in nominal terms was just 0.3 per cent in Q1 (2.3 per cent in real terms). Seen together with the impact of demonetisation, it can be surmised that there is a demand and hence investment crisis in the economy. The decline in job creation in the organised sector too bears this out.
The Centre cannot afford to dismiss this slide as a short-term effect of structural reforms such as GST and demonetisation. It needs to take immediate steps to address pain points such as the crisis in small industries. Even as the RBI is showing some urgency in bringing large defaulters to book, it needs to reconsider its inflation targeting approach when, as the Survey has observed, deflationary conditions are in our midst. A good harvest of foodgrain and horticulture crops should translate into better returns for farmers this year, for which the Centre must activate the Price Stabilisation Fund in coordination with the States.
Taking a more relaxed view of the fiscal deficit in order to step up capital expenditure (the Centre can begin with the Railways, which needs to overhaul both its technology and beef up its workforce) will help. The Modi government must back itself with out-of-the-box approaches, as it has done in the past.