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Narendra Modi to discuss economy with Arun Jaitley today: The issues that should top their agenda in 5 charts

The economic situation is ringing alarm bells in New Delhi, despite the tall claims made by Prime Minister Narendra Modi. There are indeed reasons to be worried. The GDP growth is declining, jobs are not being created and the negative impact of GST continues in various sectors.

 Narendra Modi to discuss economy with Arun Jaitley today: The issues that should top their agenda in 5 charts

Prime minister Narendra Modi and Finance minister Arun Jaitley. PTI

It is in this context that Prime Minister Narendra Modi is meeting finance minister Arun Jaitley and a few bureaucrats on Tuesday at 6 pm. According to a PTI report citing sources, the meeting will take stock of the situation and discuss remedial measures to bolster economic growth.

The meeting also comes close in the heels of former prime minister Manmohan Singh, a eminent economist himself, blaming the government for the economic slowdown.

"Both demonetisation and the GST have had some impact (on GDP growth)," Singh told CNBC-TV18 in an interview. "Both would affect the informal sector, the small scale sector... the sectors today are responsible for 40 percent of GDP," he said adding 90 percent of India's employment is in the informal sector.

"And the withdrawal of 86 percent of currency plus also GST, because it has been put on practice in haste, there are lots of glitches which are now coming out. These are bound to affect the GDP growth adversely," he said.

As Modi and Jaitley meet today, here's an analysis of the country's economy in charts:

India's GDP growth slumped to a three-year low of 5.7 percent during April-June -- lagging China for the second straight quarter -- as manufacturing slowed ahead of GST launch. The negative impact on demonetisation had not settled yet even as the government pushed ahead with the GST rollout. The expansion in gross domestic product (GDP) was 6.1 percent in the preceding quarter and 7.9 percent in the same period last fiscal. A look at the chart above will show you how the note ban just deepened an already existing slowdown in the economy. It is this decline that has prompted the prime minister to meet finance minister and bureaucrats today.

Public consumption expenditure, which the government's spending, stands at Rs 3,91,080 crore in the first quarter, higher than Rs 302,161 crore in the previous quarter. Compared with this, the private consumption expenditure declined to Rs 16,80,481 crore from Rs 18,48,300 crore. The decline in private consumption has happened despite the pre-GST discount sales as part of the destocking exercise companies resorted to. Now all eyes are on whether the companies' restocking is compensating for this decline. There are indications that this may not be happening yet. In such a scenario, the only way out will be government spending. But the question is how much can it spend. It has to be remembered that the fiscal deficit - the difference between expenditure and revenue - has already reached 92 percent of the target for the current financial year. This would mean the government has to take a decision to relax the defict target from the current 3.2 percent. In that case, the rating agencies and the Reserve Bank of India may raise an issue. Will the meeting today look at the pros and cons of such a move?

Retail inflation rose to a five-month high of 3.36 percent in August due to high costs of vegetables and fruits. The consumer price index (CPI)-based inflation stood at 2.36 percent in the previous month. The August inflation number is the highest since March 2017, when it was recorded at 3.89 percent. Overall food inflation in August also moved up, reversing the deflationary trend, to 1.52 percent. Going ahead, there are no visible signs of a dangerous spike yet. However, the monsoons have been an issue. Though the overall rains are only about 5 percent below normal, the distribution has been uneven. In such a situation, the government will have to keep a close watch on certain food items, which are likely to see a spike in prices going forward.

India's current account deficit (CAD) rose sharply to $14.3 billion -- or 2.4 percent of GDP -- at the end of first quarter of 2017-18, mainly on account of an increased trade gap. CAD stood at $0.4 billion, or 0.1 percent of GDP, in April-June of 2016-17. The figure compares with $3.4 billion (0.6 percent) for the quarter ended March 2017. However, there is no need to worry on this front as yet. "We believe the transition to the goods and services tax (GST) effective from July 2017 also led to some slowdown in export growth in a few sectors, while gold imports picked up from stocking by traders on GST concerns. That said, we expect the CAD to normalise over the coming quarters and to remain contained at 1.2%/1.4% of GDP in FY18/FY19," UBS said in a report.

This is the biggest issue that requires in-depth analysis. In the first quarter, gross fixed capital formation, or investment, grew a marginal 1.6 percent from 2.1 percent contraction in the previous quarter. However, this is just a small relief considering private sector activity remained subdued. As a percentage of GDP, the GFCF has seen a slight improvement to 29.8 percent from 28.5 percent in the previous quarter. However, a year ago the corresponding figure was 31 percent. It has to be noted that for the last 8 quarters, the GFCF has remained in a tight range of 28.5-31.2 percent of GDP.

Why is this important? Unless the investment picks up, the economy will not be in a position to create enough jobs for millions who graduate on a yearly basis. This is the biggest issue now the government is facing. What makes the task all the more difficult is the lack of credible data on jobs with the government. Apart from the various estimates floating around in media reports, nobody has fathomed the real magnitude of the situation. While the IT sector is going through a slowdown, the informal sector has seen large scale job losses after demonetisation and GST. This is likely to be at the top of the mind for the prime minister, finance minister and other bureaucrats. Unless the government devises some solution to the problem, the country is likely to fall into bigger economic chaos before the next general election in 2019.

(With inputs from Rajesh Pandathil)

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Updated Date: Sep 19, 2017 15:35:49 IST

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