Editor's note: This is the first part of a series in which Firstpost’s columnists analyse the ongoing economic slowdown and offer solutions.
No one, even in the Narendra Modi government, denies the fact that the Indian economy is passing through a critical phase. Growth is slowing across sectors impacted by a prolonged demand slump. The monetary policy committee (MPC) just announced an unprecedented 35 basis points rate cut to give a leg up to growth. Industry captains are marching to the North Block making their case for an urgent fiscal stimulus. Big and small companies are announcing job cuts one by one.
The industry, battered with the economic slowdown, thinks there is an urgent case for a stimulus package nothing less than Rs 1 lakh crore. The industry captains have met Union Finance Minister Nirmala Sitharaman to demand a reduction in various taxes and measures to boost exports. At a time when the economic activities are hardly showing any signs of uptick and job situation is worsening, the plea from the industry must be heard by the Modi government with utmost urgency.
Across sectors growth is falling; most notably in the auto industry. Sales have been plummeting; be it in the passenger vehicles or commercial vehicles and even tractors. This has been happening in the last eight to nine months.
According to the auto industry’s own estimates, about 10 lakhs jobs are at stake in the auto component industry on account of the dip in vehicle sales. Elsewhere also signs of a slowdown are visible.
Growth in eight core industries—coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity —that constitutes 40 percent of India’s industrial production dropped to 0.2 percent in June, mainly due to the contraction in oil-related sectors as well as cement production, according to official data. Even the core sector growth for May was revised downwards to 4.3 percent from the earlier estimate of 5.1 percent.
What is the actual rate of Gross Domestic Product (GDP) growth? This is a subject of a wider debate. While government data tell us economy is growing at a 7 percent-plus rate, a few well-known economists have disputed this figure. Among them is the former chief economic advisor of Modi government, Arvind Subramanian. The PMEAC, while analysing 17 key indicators, kicked up a storm saying that the actual growth rate in the economy is some 2.5 percent lower than what is officially reported. Subramanian has countered this argument. Another former CEA, Shankar Acharya, also joined the debate today. Writing for Business Standard, Acharya said actual growth could be in the range of 4-5 percent.
The case for a fiscal stimulus
Everyone knows about the state of the Indian economy. Some choose to acknowledge it, some not. Right now, the big question is what needs to be done urgently to arrest the pace of slowdown and push the economy back on the growth track. A stimulus is necessary. Economists are not very bullish on the talk of a monetary stimulus. Recently, the MPC indicated that growth was the priority at this stage when it chose to cut the repo rate by a 35 bps—for the first time ever—hoping to spur demand by lowering borrowing costs. But, even the RBI top brass knows that the process of monetary transmission is easier said than done.
The Indian banking system has an inherent problem of lack of monetary transmission. In simple words, even if the RBI cuts rates by a huge margin, the banks won’t pass on this benefit to their borrowers. And, unless the end-borrower benefits from lower rates, the purpose of monetary stimulus won’t be served. Since the start of this rate cut cycle, the RBI has cut the repo rate at which it lends short term funds to banks by 110 basis points. (One bps is one-hundredth of a percentage point). But most banks have cut only by 15-30 bps. That tells us the problem with the idea of monetary stimulus spurring consumer demand.
Even otherwise, banks have not enough money to fund the growth story. Majority of the Indian banking system is owned by government-run banks or public sector banks (PSBs). These banks, which have just finished a major non-performing asset (NPA) clean-up process initiated in 2015 by former RBI governor Raghuram Rajan, are short of money to significantly boost lending to productive sectors.
According to India Ratings and Research, the Indian arm of Fitch Ratings, the Rs 70,000-crore capital infusion announced in the Budget is inadequate to push credit growth. “India Ratings and Research (Ind-Ra) opines that it is time to reevaluate the objectives of the PSBs and their role in the Indian economy. While the government has infused huge capital in the PSBs, the same has largely been used to mitigate losses and has failed to contribute meaningfully to credit growth.”
With the banking sector constrained with high NPAs and capital shortage, the onus to revive the economy goes back to the government. A combination of tax cuts, incentives to specific sectors and promote exports could help halt the economic slowdown. An early economic resolution shouldn’t be delayed on account of the political battle between the ruling party and the Opposition on a range of other issues. The government must act before it is too late.
Updated Date: Aug 17, 2019 10:34:39 IST