Three bits of data released on Friday are disappointing at different levels. Lower growth in GDP, stagnant growth in core sector in April 2019 and the government just about managing the 3.4 percent deficit number in FY19 pose puzzles for the new Cabinet which assumes responsibility of kick-starting the economy. There is a need for deep introspection and direct action to revive the economy.
There can be no debate on the fact that the economy is stagnating. The Q4 GVA growth number is the lowest this year at 5.7 percent and with the exception of some bright numbers in construction, finance and public administration, the rest of the numbers look gloomy.
The negative growth in agriculture is worrisome as the rabi crop was expected to be better this year. It has probably been pushed down by the allied sectors. The internals show that manufacturing growth is just 3.1 percent and mining at 4.2 percent and electricity at 4.3 percent. The transport, trade, etc sector has lagged at 6 percent. These sectors should ideally be growing at a rapid rate which is not happening.
The annual numbers show similar trends and the fact that growth has been lower than 2016-17 and 2017-18 when there were disruptive reforms indicates that the negative impact has come in with a lag. This can be put together with the SME sector which has been impacted quite severely in the last two years. This shows in manufacturing as well as services where they tend to dominate.
As growth in GVA has come down from 7.9 percent in Q4-FY18 to 7.7 percent , 6.9 percent, 6.3 percent and 5.7 percent sequentially, there are clear signs of the economy winding downwards. While the statistical base effect will provide some solace next year, clear action is needed in some sectors.
First, agriculture has to be made robust which includes both enhancing productivity as well as delivering higher prices to farmers. Last year the government announced higher prices (MSP) but was not able to deliver the same as mandi prices ruled lower and there was no procurement process for crops outside of wheat and rice. This has to be addressed in the coming kharif season where a delayed monsoon, which looks likely will create some disruption in sowing pattern as well as harvest.
Second, manufacturing has to be on top priority because growth of 3.1 percent in Q4 and 6.9 percent in full-year FY19 has to be higher to create jobs as well as GVA. There have to be concrete steps taken here and the focus has to be also on SME which have faced problems in finance as well as taxation. The Budget should try and address these issues as this will take time to sort out.
Issues relating to labour and land have to be taken up for discussion and the commerce ministry must work with the exporters to ensure they can sail through these turbulent and uncertain times when there are trade wars, sanctions and Brexit on the anvil or already in place.
Third, the government has to play a more proactive role. While its contribution to GVA growth has been high at 8.6 percent for the year, the fiscal numbers released for FY19 point to the government cutting back on capex to meet the 3.4 percent number which has meant a cut of Rs 13,000 crore. This has happened because revenue has fallen short on taxation—both GST and direct taxes as corporate India did not do too well.
The government has to ensure that in FY20 the budget does not compromise on capex as it has backward linkages with sectors like cement and steel which were the main drivers of the IIP last year. There are pressures to rationalise GST rates further and if done, could lead to further pressure on revenue. A right balance has to be found here.
In fact, two important factors this year in the budget will be the use of RBI reserves (which appears a certainty now) as well as disinvestment, as these will be useful sources of revenue at a time when there is uncertainty on tax collections which are linked with growth.
The positive sign, however, is that the investment rate has improved from 28.6 percent to 29.3 percent. While there are few signs of private investment picking up, it can be attributed more to government capex on roads and housing.
Private investment has been low key as there is still excess capacity and most sectors and infra investment has been held up given the issues pending with the IBC. Also, problems in the power and telecom sectors have come in the way of fresh investment. The government has to talk to private players and revive their interest in infrastructure.
The core sector data shows that this segment grew by just 2.6 percent in April with cement and steel not registering high growth rates. Quite clearly government activity has been subdued prior to the Elections and focus was more on handling the event. For all practical purposes it can be assumed that the growth plans will begin from July onwards after the Budget is presented.
It will hence be a very important document as it will show the way for the private players too. This also means that the pressure points in the form of finance, tax rates, infra expenditure, specific sector-related policies etc. have to be addressed.
On the whole, the data released on Friday point towards challenging times for the government which has nine months virtually to deliver higher growth by addressing myriad issues. If one also adds the unemployment figures released for FY18, however, the picture is grim as 6.1 percent does indicate that it could not have improved in FY19 when GDP growth came down!
(The writer is Chief Economist, CARE Ratings)
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Updated Date: Jun 01, 2019 09:07:02 IST