Arresting the growth slowdown

With the CSO’s latest estimates showing that the economy lost further speed to grow by just 5.8 per cent in the fourth quarter, India’s GDP growth for FY19 (at 6.8 per cent) has undershot even pessimistic forecasts. From a breakdown of the numbers, the key pain points seem to be flailing agricultural growth (from a positive 6.5 per cent in Q4 FY18 to minus 0.1 per cent in Q4FY19), a sharp slippage in manufacturing (from 9.5 per cent to 3.1 per cent) and lower government spending. While a normal monsoon may alleviate the prospects for agriculture to some extent, it may be harder to resuscitate industrial growth or private spending which have suddenly faltered in recent months. In the circumstances, it would be a mistake for the new government at the Centre to dismiss this GDP print as an aberration that will sort itself out without its active intervention. Tight fiscal and monetary policies have played a big role in scuttling the economy’s revival from the twin shocks of demonetisation and GST in the last two years. Addressing these now appear critical to putting the economy back on the fast track.

India’s real interest rates have remained too high for too long. The latest GDP numbers strengthen the case for the MPC to deliver a significant rate cut in its upcoming review, without further ado. For the lower rates to stimulate corporate investments and private consumption though, the RBI will need to fix the tardy transmission of policy rate cuts by banks. With the impact of the Seventh Pay Commission wearing off, a direct fiscal stimulus to resuscitate the flagging economy seems to be in order. In FY19, the Centre found itself boxed into a tight corner by slowing tax revenues which forced cutbacks on productive spending. But it can free up fiscal headroom this year, if it brings back anti-evasion measures on GST, takes up strategic PSU sales on a war footing and summons up the political will to rationalise redundant subsidies. Targeted public spending on sectors that create a multiplier effect on the economy — on housing, urban renewal or vehicle scrappage for instance — can fetch considerable bang for buck.

More money to lubricate the engines of the economy need not come from the government alone. A cut in the Cash Reserve Ratio will help banks step up their credit flow to industry and the beleaguered NBFCs. Devising a liquidity lifeline for NBFCs, who have bankrolled the economy when domestic banks were struggling with bad loans, is critical to sustain credit to underbanked segments too. This can be done after an asset quality review that sifts the good NBFCs from the bad. Last but not the least, the government must stay off unwarranted policy interventions in sectors such as e-commerce which have been enormously successful at attracting foreign capital to bankroll their high growth rates, while visibly contributing to domestic job growth.