No silver bullet for stopping slowdown

The official data on the health of the economy is released by the government every quarter. There is a gap of exactly two months between the end of the quarter and the data release. Thus we got data on the quarter ending June on the last day of August. Such a time gap is possibly on par with other economies, since official data tracking, cleaning and compilation takes some time, despite the best infotech systems.  There is however other “high frequency” data released too.

For instance, the index of industrial production, or the consumer price index (CPI) based inflation is released every month, the banking credit data comes from the Reserve Bank of India every fortnight, and of course the stock market barometer gives out data every day, nay every minute! There are plenty of other signals emanating all the time: airline traffic, ships and cargo going through ports, telecom subscribers, inflows into mutual funds and so on. So it is not as if analysts and economy watchers don’t have some inkling about the health of the economy even before the government gives it with its stamp of authority. Of course the same data can then be interpreted as a glass half full or half empty, as is always the case in India.

Some sobering facts are crystal clear, and need to be acknowledged. The economy has been on a slowing trend. Quarterly GDP growth declined for the sixth consecutive quarter, ending June 2017. Starting with quarter ending March 2016 last year, the growth rates have been 9.2, 7.9, 7.5, 7.0, 6.1 and now 5.7 for the latest June ending quarter. This is one of the longest continuing declining trend in recent times. No doubt some of this decline has been aggravated by the adverse effect of demonetisation, and temporary disruption due to the rollout of the Goods and Services Tax (GST) in July.  But we need to understand the underlying structural reasons (including perhaps external and global factors), and more importantly tackle the proximate causes urgently.

GDP is measured in at least two different ways. It is the sum total of output from three sectors: agriculture, industry and services (the supply side approach). Or it can be seen as the sum total of the nation’s spending on four categories: consumption, investment (i.e. capital formation), government and exports (i.e. what foreigners spend on India’s products). Whichever way you look at it, all these components are slowing down. On one hand, industry growth was merely 1.6 percent, of which the manufacturing grew only at 1.2, the lowest in five years. On the other hand, investment spending, which determines how many new factories or power plants are being built, was growing only at 1.6 percent. This component of GDP (as seen from the spending side) needs to grow at 15 to 20 percent not just for faster growth now, but also in the future. That’s because today’s investment determines tomorrow’s growth. So the fact is that all engines of growth are sputtering. Even government spending which provides fiscal stimulus, is slowing perhaps because it is running out of fiscal fuel. The increase in excise taxes on petrol and diesel is not helping in a slowing economy. The government is committed to reducing the fiscal deficit, and falling oil prices have helped in reducing oil subsidies. But at a time like this, excessive fiscal conservatism may be counterproductive. It’s true that slippage on fiscal deficit targets make international rating agencies unhappy. But fiscal stimulus is something that even the conservative IMF had recommended as an antidote to Europe’s woes.

This is not the place to analyse what has caused this slowdown. Suffice to say that it is a combination of factors: exports underperformance, lack of private sector enthusiasm for new capex, banking stress and NPA’s leading to credit drought, insolvency resolution causing balance sheets to shrink, the deflationary effect of low farm prices, and of course the lingering effect of demonetisation on the rural and informal economy.

So what is to be done? For the medium to longer term, it is to build consumer and producer confidence, in spending and investment, respectively. This is as much psychology as economics. It is as much about implementing reforms, as communicating and articulation. (For instance, whatever the reasons to hike excise taxes on petrol and diesel, the government needs to communicate the logic better. Even more so, when falling crude prices lead to expectations that retail prices will also fall.) The short-term strategy is a combination of fiscal and monetary measures. The former includes not just extra fiscal spending but also tax relief, and aggressive disinvestment. Affordable housing is one specific area that can provide a big boost to job creation, to demand for industrial products like building materials, and to consumption. One success story is from Kerala which adopts pre-fab technology for rapid deployment of affordable homes. Fiscal funds also need to flow generously to recapitalize banks. The taxes on petrol products should be trimmed, which benefits consumers as well as general inflation. Exports need fiscal support too, since the incentive schemes both for manufacturing and services have not borne sufficient fruit. Exporters who now pay GST and claim refunds later, should not have to wait and incur cost of working capital. On the monetary side, we need to moderate the excessive strengthening of the rupee. This hurts domestic industry as cheap imports eat into their market share. Lower interest rates will help too, although the RBI has to balance this with concerns about inflation.  The plus side of slightly higher inflation is that it leads to lower real interest rates, which may spur more industrial investment. Beyond fiscal and monetary measures are policies like continuing with the agenda of improving ease of doing business. India is aiming for a global rank of below 50, but we are still stuck somewhere near 130. There is a lot to do on reforms in the process of clearances, dispute settlement, getting credit and taxation. Finally there is the farm sector, which is suffering from deflationary forces, as documented in the Economic Survey.  Stopping and reversing the slowdown calls for a multi sectoral, multi-pronged, multi-government level approach. There won’t be one single silver bullet.

(The writer is an economist and Senior Fellow, Takshashila Institution)