Booster packages or bitter pills - what can help our slowing economic growth?

Slowing automobile and home sales have been a cause for worry for the Indian economy, besieged by a slowdown for four straight quarters now. To prop it up and infuse it with momentum, many measures have been adopted. Going forward, more, however, needs to be done.

One full dismal year of slow economic growth later, signs of a turnaround seem bleak.

The 6.8 percent GDP growth rate clocked in the previous fiscal year of 2018-19 is set to go down further in the current fiscal year. Ratings agency Moody’s has revised downwards India’s GDP growth forecast for the current year to 6.2 percent. The RBI too has revised downwards its growth projection for the current fiscal to 6.9 percent from its earlier 7 percent in June.

Plunging consumption is the reason why we haven’t got it right, says every report; sagging sales of automobiles, real estate and even FMCGs (fast moving consumer goods) have dealt a severe blow to the economic mechanism.

The antidote involves multiple steps in various directions for the recession appears to be one that cannot be shaken off easily.

Not wasting much time, Finance minister Nirmala Sitharam has already introduced a slew of measures.

While some have welcomed those, others are not quite convinced. The latter group label them simply as a stimulus package that fails to address the root cause.

Their effectiveness, only time will unravel.

Going forward, maybe, far more drastic and less populist measures would be needed to bring about a sustained, stable growth.

As of now, we as concerned citizens, very much at risk of losing our livelihoods to the recession, can at best analyze the effectiveness of those measures and think upon what more could be done.

Boosting private investment

Production and consumption go hand in hand. With slowing consumption, industrial production has almost come to a standstill. This has led to fewer jobs in the market which has further hampered demand for goods.

To undo the vicious cycle, RBI has reduced the repo rate (it is the rate at which the central bank of India lends to other commercial banks) four times in a row in 2019 up until this month. It expected the public and private commercial banks to borrow at lower rates from it and lend to businesses and retail customers at lower rates too. This would have provided a much needed to fillip to both consumption and subsequently production.

Turns out, it wasn’t sufficient enough. Banks, particularly, the state-owned ones, sitting on a humungous of pile soured debts and seeing poor household savings simply don’t have the courage to lend. So, they have shied away from reducing rates in tandem.

Both the RBI and the government have been nudging the banks to pass on the benefits to their customers, but might need to frame stringent rules in this direction if it still does not happen.

Meanwhile, before and if that happens, the government has decided to recapitalize public-sector banks to the tune of Rs.70,000 crore at one go. This would provide them with the much-needed liquidity to lend.

Small and medium entities, a lifeline for our economy, are limping too due to liquidity shortage as well. To ameliorate their condition, Nirmala Sitharam has promised faster GST refunds. This along with the recap of banks will give them more working capital. This can go a long way in improving exports and creating jobs.

Another booster dose by the government is the allocation of Rs.100 lakh crore for infrastructure sector, which is another potential employment creator. A host of sops have also been announced to increase sales in the automobile sector including removal of the ban on buying new vehicles by the various departments of the government.

Are these surefire methods?

Well, not really. Former RBI governor Raghuram Rajan feels deeper structural changes are needed to put private investment, which is at a 14-year-low, back on track.

Such structural changes could entail mobilizing the nations bond and equity market better. So far, banks have been the main capital providers for businesses. And mostly they are left helpless when businesses suffer losses or when corrupt owners channelize the loaned money elsewhere and don’t repay willfully.

Bond and equity markets, on the other hand, can create greater accountability among organizations as investors will otherwise withdraw their money or not bet big on them.

Other measures could include slashing of corporate taxes and reducing bureaucratic hassles to set up and run businesses.

Recent announcements in this direction have already been made by Nirmala Sitharam: lessening of surcharge on long term and short capital gains for both FPI (foreign portfolio investors) and domestic investors. A simple Aadhar-based KYC for mutual fund investors is also expected to draw investors.

Further, the finance minister has also announced withdrawal of “angel tax” for startups registered with commerce ministry.

While all these is on the business front, other bold moves by the government can include scrapping of free or heavily subsided electricity to farmers (it can ameliorate the power sector woes), fertilizers and water. Because of these, there is unnecessary glut in rice, cotton and sugar production. There are hardly any takers for the crops except for the government trying to support the beleaguered farming community.

What one needs to realize is that for a nation to progress, manufacturing sector and tertiary services sector must grow fast. Farming cannot sustain economic growth.

To achieve that, populist booster packages putting a strain on the fiscal deficit are not the panacea in the long run. If anything, it’s bitter pills that may initially inconvenience a section but later go on to bear fruits for everyone.

Let’s just hope the government comes up with more such announcements in the next week – only then can we inch closer to becoming a $5 trillion economy by 2025.