State of the Economy: Growth could have been 1% higher without note ban, GST, says economist Madan Sabnavis

Three-and-half years after the Narendra Modi government came to power, economy has become central to the political and public discourse. The GDP growth has slowed for five consecutive quarters.

Pain in certain segments of the economy such as manufacturing, rising unemployment and weak industrial performance have resulted in heavy criticism against the government from both within and outside the Bhartiya Janata Party. Senior BJP leader and former Union finance minister, Yashwant Sinha and economist-turned-politician, Subramanian Swamy recently criticised the government for mismanagement of economy. The government’s economic moves such as demonetisation of high value notes in November last year and timing of the rollout of goods and services tax (GST) have been blamed for worsening the mess.

On Tuesday, the International Monetary Fund (IMF) cut the India GDP growth forecast for 2017 by 50 bps to 6.7 percent. This was shortly after the Reserve Bank of India (RBI) lowered the growth for the current fiscal year by an identical margin.

Madan Sabnavis, economist at CARE Ratings.

Madan Sabnavis, chief economist at CARE Ratings.

On the other hand, there are renowned economists like Jagdish Bhagwati who have refuted these forecasts and have consistently endorsed the Modi government’s economic moves such as note ban. In short, there are two lobbies arguing in favor and against Modi’s economic policies.

The Indian economy had been on a consistent growth path (above 7.5 percent) for at least eight consecutive quarters when it touched 9 percent growth in the fourth quarter of fiscal year 2016. From there, the downfall began. The GDP growth continued to decline touching a worrying 5.7 percent in the April-June quarter. If one looks at the gross value added (GVA) numbers, the fall in growth has been even sharper. It stood at 5.7 percent in the first quarter. Even this figure could be lower than what it shows on account of a higher base last year.

Much of this growth has been supported by higher government spending rather than fresh investments by the private sector. GFCF (gross fixed capital formation) has been on a steady decline. Growth in manufacturing and industry has fallen while services sector growth helped to an extent in the June quarter.

The newly formed Prime Minister’s Economic Advisory Council (PMEAC) acknowledged the economic slowdown in the economy in its first meeting and reached a consensus on the reasons for the economic slowdown. The jury is still out on the merits and demerits of the Modi government’s economic decisions.

To understand the economic situation better for the benefit of readers and take the discussion ahead, Firstpost is beginning the ‘State of the Economy Dialogues’ starting Thursday. This will consist of a series of video discussions with experts from different backgrounds. We speak to Madan Sabnavis, chief economist at Care rating agency, in the first of this series.

Sabnavis is of the view that despite the prevailing negative perception, not all is bad in the economy. Certain key economic indicators such as fiscal deficit and inflation are remaining strong, he said, adding one shouldn’t expect too much from the government to miraculously transform the economy. But, Sabnavis cautions that the government needs to take urgent action to address the pain areas such as absence of fresh private investments, rising unemployment, policy inconsistencies and, more critically, solve the problems in the banking sector.


Published Date: Oct 12, 2017 01:43 pm | Updated Date: Oct 12, 2017 01:47 pm


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