No harm in disputing IMF projections on India, but cannot ignore hard realities on growth front

  • Economists have a consensus view now that demonetisation 2016 added pace to slowdown by impacting India’s cash-dominated informal economy

  • The botched rollout of GST discomforted small businesses with its complex structure and technology issues

  • Reforms in the banking sector, dominated by government banks, were largely confined to mergers of weak ones with relatively stronger banks

From being the world’s fastest-growing major economy just a year ago to the ‘biggest drag on world economy’ now, IMF’s ruthless reversal on India has come as a surprise to many. As economist Rupa Subramanya argues in this piece for Financial Express, just a year ago IMF chief economist Gita Gopinath appeared bullish on Indian economy. Did the International Monetary Fund (IMF) get its prediction wrong?

In January 2019, IMF’s forecast for India was 7.5 percent. This was revised down to 7.3 percent in April, further down to 7 percent in July, 6.1 percent in October and now to 4.8 percent.

As Subramanya says in the article, “If the IMF were a private forecasting agency, it would have been discredited and out of business by now, with all of the faulty forecasts...”

 No harm in disputing IMF projections on India, but cannot ignore hard realities on growth front

Representational image. PTI

While the credibility of the IMF forecasts is a point of debate, the fact is that India going down in IMF’s global Gross Domestic Product (GDP) growth chart is only confirming what we already know. The warning signals should act as a wake-up call to India’s policymakers on things that have possibly gone wrong in the domestic economy over the last few years.

How did the Indian economy slow down?

What befell Asia’s third-largest economy to receive such a thumbs down from the IMF in the span of just one year? When the Narendra Modi-government came to power in 2014, growth was already slowing. But economists have a consensus view now that the demonetisation of high-value notes in November 2016 added pace to the slowdown by impacting India’s cash-dominated informal economy.

The note ban, launched with the idea of terminating black money and fake currencies, not just proved to be a failure in achieving the stated targets, it also dealt a body blow to India’s informal economy, which is a major employer to millions of Indians. Small businesses suffered greatly pushing more people to poverty and unemployment. The unemployment rate rose to a 45-year high of 6.1 percent in 2017-18.

Experiments gone wrong

Similarly, the botched rollout of Goods and Services Tax (GST), discomforted small businesses with its complex structure and technology issues. The government’s inaction on politically sensitive but economically critical land, labour reforms and refusal to approach privatisation with a sense of urgency, meant the real reform agenda took a backseat. Schemes like ‘Make in India’ initiative and call for ‘ease of doing business’ promised a revolution for businesses on the ground but didn’t pick up in the desired way.

Reforms in the banking sector, dominated by government banks, were largely confined to mergers of weak ones with relatively stronger banks. At the same time, the government could not capitalise the banks well enough to meet the mandatory reserve requirements and credit expansion. With more people becoming jobless and consumer confidence plunging to a six-year low, demand scenario took a major hit.

When the economy slowed down, banks began to face fresh pain on asset quality. Consumer-oriented sectors such as auto and fast-moving consumer goods (FMCG) were among the first to feel the heat of slowdown. Private investors, concerned with ground realities, remained on the sidelines passing the whole burden of growth-supportive spending on the state exchequer.

What next?

There is a big disconnect between what the government projects on economic growth and the real growth on the ground. For instance, even as the economy was exhibiting signs of deep distress, the Modi government is confident to achieve $5 trillion economy target by 2024. What lacks is clarity on who will pump in the money.

The over Rs 100 lakh crore investments proposed in the country’s infrastructure sector is one such example. India has been spending an average Rs 8 lakh crore annually since FY13 on infrastructure, according to official data. To reach the target of Rs 100 lakh crore investments in, say, five years, the investments need per year is around Rs 20 lakh crore. That, in the current fiscal scenario, looks a bit of a stretch.

The projections from the IMF and other agencies can be disputed but not the ground realities. Right now, there are no signs of early economic recovery. The reversal of factory output to positive zone after three months of continuous contraction offers some hope. But the constant decline in bank credit growth to industries, the slump in consumer demand in auto, FMCG sectors and lacklustre performance in the manufacturing segment continues to point to a subdued economic trend. Finance Minister Nirmala Sitharaman’s Budget next week is the next big trigger. The other one will be the performance of monsoon this year.

(Data support by Kishor Kadam)

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Updated Date: Jan 24, 2020 13:32:09 IST