Speaking at a book release function some ten days back, Finance Minister Nirmala Sitharaman said she was often asked if the slowdown was structural or cyclical but she was less interested in that debate and more focussed on addressing the problem. The sentiment is commendable but the policy response will vary depending on the causes.
The three sets of economic data released on Friday—economic growth numbers for the second quarter (Q2, July-September) of 2019-20 and the core sector and public finance numbers for the April-October period—show that the government cannot afford to get its diagnosis wrong. There is not one redeeming feature in them, the worst obviously being the Q2 gross domestic product (GDP) growth of 4.5 percent—the lowest in 26 quarters.
The gross value added (GVA) growth numbers (4.3 percent overall, against 6.9 percent in Q2 of 2018-19) show every sector, barring government, has posted lower growth. The manufacturing sector has seen a decline in output after stagnant growth in Q1 (April-June). In almost all sectors (again, government being an exception) the performance has been worse than in Q1.
The story is repeated when one looks at the first half (H1, April-September) figures, which should net out any seasonal factors that may be at play. GDP growth was 4.6 percent against 7.5 percent in H1 2018-19; GVA growth was 4.6 percent against 7.3 percent. Every sector, barring government has underperformed.
The government sector doing well brings its own set of problems—high government spending will put a burden on the fisc. Fiscal deficit in April-October has already crossed the full year target. If more government spending is needed to perk up the economy, where is the money going to come from, given that tax revenue has contracted for three straight months? A soaring fiscal deficit will have other damaging consequences, notably a crowding out of private investment at a time when the economy sorely needs it.
Private investment (reflected in gross fixed capital formation, GFCF) not only slipped in terms of percentage of GDP (to 27.8 percent in Q2 from 29.2 percent in the same period last year and from 29.7 percent in Q1) but also in terms of growth. At 1 percent in Q2, GFCF growth was almost stagnant; it was 11.8 percent in Q2 of 2018-19. This is not a one-quarter blip—growth in Q1 was a mere 4 percent against 13 percent in Q1 of 2018-19. For the April-September period, growth was a mere 2.5 percent against 12.5 percent in the last fiscal.d
But will private investment revive without enough demand? The Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for Q1 of the current fiscal shows capacity utilisation falling to 73.6 percent from 76.1 percent in Q4 (January-March) of 2018-19, after having climbed up steadily from Q1 of that fiscal. The survey also showed three successive quarters of decline in new orders and increase in finished goods inventory for two consecutive quarters. There is clearly a demand problem in the economy.
Friday’s data shows a slight uptick in private consumption (reflected in private final consumption expenditure) as percentage of GDP. In Q2, PFCE was 59.3 percent of GDP, up from 58.3 in last fiscal’s Q2 and 57.7 percent in Q1 of this fiscal. But growth has fallen. In Q2, at 5 percent PFCE growth was almost half of the 9.7 percent logged in the same period last year. That was the story in Q1 (3.1 percent this fiscal against 7.3 percent in the last fiscal) as well as H1 (4.1 percent in the current fiscal against 8.5 percent in the last fiscal).
For some specifics, look at the core sector data. Electricity consumption growth slumped to 1.5 per cent in April-October this year against 6.8 percent last year. The petroleum ministry data shows diesel consumption in April-October declining slightly (0.1 percent) over April-October 2018-19, when it had shown a growth of 3.8 percent over Arpil-October 2017-18.
It would be unfair to say the government has not responded to the problem (though it has been late in acknowledging that there is one). Over the past few months, a series of steps have been taken or announced—corporate tax rate cuts, bank consolidation, unified labour codes, clearance of strategic sales of public sector undertakings. These are welcome.
But these are not ecstasy pills that will perk up the mood immediately. Some of these measures will take time to implement, others to yield results on the ground and some both to implement and yield results. The government cannot afford to take its eye off the ball. Most importantly, it should refrain from mis-steps that are likely to worsen the sentiment.
The most egregious example is the move to cap fares and surge pricing by cab aggregators. With tax revenues falling, the tax bureaucracy is not being reined and they continue to run amok. The government’s talk about minimum government is not borne out by its actions. All this will prove counter productive and only worsen the economic situation. Let’s hope someone in the government understands and acknowledges this.
(The writer is a senior journalist and author. She tweets at @soorpanakha)
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Updated Date: Nov 30, 2019 13:02:31 IST