Uncertainty’s bleeding the economy

The Government has not been successful in kick-starting the sagging economy. This is indicated by the dismal performance of the Index of Industrial Production (IIP) released recently.

The general index for March 2016 is 0.1 per cent higher compared to the level in March 2015.

It is a matter of concern because lower growth is mainly due to the negative growth of 2.9 per cent in capital goods compared to a robust 6.3 per cent growth the previous year.

Similarly, growth in basic goods is half that of the previous year. On prices, the consumer price index is beginning to look up with CPI (combined) at 5.4 per cent in April 2016 compared to 4.9 per cent a year earlier, and food prices at 6.3 per cent compared to 5.1 per cent in the previous year.

Prices are rising rapidly in the case of pulses, sugar, spices, and meat and fish products. The low growth in IIP, an advanced indicator and proxy for growth, along with inflation looking northwards, is a litmus test, forecasting a difficult period ahead.

The most important issue is why growth, alongside employment, is not improving, despite a revival of sentiments due to multi-spectral measures such as financial inclusion, Make in India, Stand-Up and Start-Up India, social security programmes, the MUDRA bank, and small and payments banks, among many other efforts.

The Reserve Bank has also been matching the Government’s steps by reducing interest rates. Therefore, there is need for a discussion on how to revive a faltering economy.

First, it needs to be recognised that the Indian economy is a bright spot in the world landscape. The International Monetary Fund continues to project a growth rate of 7.5 per cent in 2016 and beyond; it’s the fastest growth rate to be recorded for any economy.

Also, the growth rate has recovered from a dismal 5.1 per cent in 2012, mainly because of domestic demand and lower global oil prices. However, declining exports, and a weakening balance sheet from the corporate sector and banks is cause for concern.

The Government is aware of the grim situation and at a recent conference of secretaries, recognised and discussed eight themes that could help transform India.

These were: inclusion and equity; employment generation; universal access to health and education; good governance; farmer-centric issues in agriculture; Swachh Bharat; energy conservation; efficiency and innovative budgeting and effective implementation.

Although the Government has been active in all these areas, growth remains elusive. Therefore, there is need to investigate the reasons for this and then devise a solution to revive the economy.

The key factor is low demand in the economy which could be attributed to various reasons. First, the uncertainty in agriculture sector with drought in many States.

Again, industry is uncertain about the path of interest rates in the case of poor agriculture output. The poor health of the banking system has also infused uncertainly in the minds of borrowers and lenders.

The rising prices of petroleum goods in the international market could imply rising inflation.

The persistent flip-flop in the making of government policy announcements only reflects uncertainty in policy matters — be it the provident fund or the diesel ban on 2000 cc vehicles.

The weak performance of the economy could imply a lower purchasing power reflected in a lower demand for the industry, leading to a spiralling of weak growth.

The clear conclusion that is emerging is the prevalence of uncertainty, despite government initiatives, that is negatively impacting growth.

How is this happening?

First, uncertainty impacts consumers who postpone the purchase of durables. Firms, because of low demand for consumer durables, reduce production, and postpone investment and hiring plans.

Uncertainty impacts financial markets too as expected returns decline and the prices of collaterals change.

Finally, industries that immediately get impacted are those with forward and backward linkages such as houses, automobiles, machinery and equipment, which then further impacts economic growth.

The need is to address this uncertainty. This can be done in various ways.

First, it would be helpful to evaluate the impact and efficiency of each of the existing policies announced in the last two years.

Second, in absence of the Planning Commission, there is need for a bottom-up approach where developmental and growth issues are identified at the State level.

Third, to achieve wider acceptability and minimise the probability of withdrawing measures after the announcement, a public debate on issues needs to be initiated.

After achieving consensus through dialogue, cautious and sequential implementation could be considered.

Finally, to instil confidence in the public that the economy is in expert hands, and initiatives are thought through, there is need to have a team of well-trained and experienced economists with domain knowledge of India to advise Prime Minister Narendra Modi and Finance Minister Arun Jaitley.

Such a panel of economists could also assist in planning for the future — 5 to 50 years ahead — and preparing India to become a global superpower.

These economists can be deputed to shoulder global responsibilities, as economic ambassadors of India, in multilateral institutions.

To conclude, there is need for a change in strategy, and not direction, to achieve higher growth.

The writer is the RBI Chair Professor of Economics, IIM, Bengaluru