1. Home
2. Editorial

Indian economy on edge

Kashmir Times. Dated: 9/6/2019 12:29:56 AM

The central government will have to go in for far-reaching reforms to keep the economy from stalling

Even after the announcement of new measures by the Finance Minister Nirmala Sitharaman last week for giving a fillip to the economy, deepening slowdown has now left the Indian economy on the verge of stalling. This is not happening only to Indian economy due to the wrong policies of the NDA-government in its first tenure but also some of the steps taken in its second term, when it has failed to address the concerns of the markets. The latest estimates for the Gross Domestic Product (GDP) show year on year growth in the April-June period of the current financial year slid for a fifth straight quarter to less than 5 percent, the slowest pace in more than six years. The fresh input from the reserve received from the reserves of the Reserve Bank of India (RBI) to the extent of Rs 1.78 lakh crores. It is a matter of serious concern that the mainstay of demand - private consumption spending - slumped to an 18-quarter low, with the expansion decelerating sharply to 3.1 percent, from 7.2 percent in the preceding quarter and 7.3 percent in the previous year. Gross Fixed Capital Formation (GFCF), a proxy for investment activity, grew a meagre 4 percent, less than a third of the 13.3 percent growth it posted 12 months earlier. The RBI had, in its annual report released on Thursday last, noted that indicators of GFCF had shown either moderation or contraction in the fiscal first quarter and pointed specifically to Gross Value Added (GVA) by the construction industry, which government data revealed had eased to a 5.7 percent pace, from 9.6 percent in the year-earlier period. With demand for manufactured products ranging from cars and consumer durables to even food products including biscuits having sharply diminished, manufacturing GVA growth plunged to an eight-quarter low of 0.6 percent. In fact, save mining, electricity and other utility services and public administration and defence, all the five other contributors to overall GVA weakened from a year earlier. And as the RBI observed in its last monetary policy statement, consumer confidence gauged by its July survey has worsened appreciably, with 63.8 percent of respondents expecting discretionary spending to stay at the same level or shrink one year ahead. The comparable reading in June 2018 was 37.3 percent.
It should now be understood that the central government is cognisant of the gravity of the situation is evident from its recent slew of policy pronouncements including tweaks to investment norms to draw more Foreign Direct Investment (FDI), moves to relieve the debilitating sales slump in the auto sector and a sweeping consolidation of public banks, which has been conceived by the government as one measure to consolidate the gain in the financial sector. Any beneficial impact from these measures will, however, take time to feed into the economy and time is a luxury that the faltering economy can ill afford, especially given the global headwinds. The argument that the Indian economy was shielded from the external factors is totally wrong. It is only now that the announcements made last week claimed that Indian growth was better than the world scenario. With the farm sector still stuck in a low income trap and this year's mercurial monsoon rains, leaving some parts flooded and others still facing deficit rains and engendering a shortfall in Kharif sowing, rural demand is unlikely to return any time soon. Also, with the RBI's four interest rate reductions since the start of 2019 having, so far, failed to incentivise credit-fuelled consumer spending and business investment to any significant degree and with limited fiscal headroom to try and prime the pump with increased expenditure, big, bold structural reforms may be the only way out. The government must lose no time in consulting with the widest possible spectrum, including the Opposition, and then implement the agreed-on reforms prescriptions to reinvigorate demand and investment in an attempt to put the Indian economy on the right track.