A single bad year does not imply an economic crisis but presents an opportunity to address long-standing issues that curtailed gains
In an article in these columns on September 17 titled, Recovery will take time, we discussed our outlook on the Indian economy. Today, we will explain why it is important to recognise the different contours of the current economic slowdown and how the worst is probably over and we’re looking at a recovery.
For starters, our initial forecast was 4.9-5.3 per cent of the Gross Domestic Product (GDP) for the second quarter (Q2). The official statistics for the Q2 of the GDP will be released on November 29 and therefore, it is important to give our final forecast for the same. At the time of our initial prediction, we didn’t have the Index of Industrial Production (IIP) data and other key variables such as the Wholesale Price Index (WPI) and Consumer Price Index (CPI) for September. This posed a challenge, as the projection was based on our understanding of what was likely to happen to all these variables.
The September figures defied all expectations of analysts as they were weaker than anticipated. Though, assessment for these variables was not off the mark, to some degree, it was optimistic about a healthy and swift recovery from the third quarter (Q3) onwards. While recovery has indeed started, it doesn’t appear to be as swift as anticipated and we suspect our fourth quarter (Q4) figure will be slightly lower than seven per cent. Therefore, Q2 may be lower than the initial assessment. We now have the additional benefit of data for October and this gives us an advantage as we can see the churn in economic activity from the first week itself.
Leading forecasters have revised their Q2 projections to 4.2-4.5 per cent and the consensus view appears to be 4.4 per cent. However, as compulsive contrarians, our forecast range remains at 4.6-5.0 and we believe the figure to be closer to 4.7 per cent based on our assessment. Of course, predictions can go wrong and they really do. However, as things stand, we believe that we are all too conservative and, therefore, growth may very likely surprise us. However, once the figures are released, politics is likely to follow on what is a simple statistical process. It is, therefore, important to pre-empt the misinformation that is likely to be spread because of a sub-five per cent figure.
First things first, growth in general happens in cycles, that is, at times an economy grows faster than its potential and at other times it grows marginally slower. This is what is known as business-cycles. Therefore, we are in a negative business cycle, induced primarily because of banking sector stress and there have been measures to address this over the last couple of months.
However, one must recognise that a few quarters of bad growth don’t matter much in the larger scheme of things. That is, despite a slow start in the first half, the annual growth rate is likely to be 6.1-6.3 per cent. The Reserve Bank of India (RBI) expects the growth to be at 6.1 per cent, while several international agencies, too, have a similar assessment. However, yet again, this assessment is based on a poor show in the first half of the financial year. As we get more data, a lot of these forecasts would be revised, but chances of a significant revision are very small. A growth of 6.1 per cent is not half as bad as many may believe it to be, for the simple reason that this growth came at a time when the economy witnessed a credit squeeze due to the shadow-banking crisis. Moreover, one cannot ignore the fact that the world is going through what the International Monetary Fund (IMF) has termed as a synchronised deceleration of growth rate.
A lot of the global factors are induced by trade-related uncertainties, which have dampened investment and consumption in many of our trading partners. A growth rate of 6.1 per cent may be low but consider the fact that in 2008, it was at 3.2 per cent and it was between 5-6 per cent in 2011-2013. Therefore, a single low growth year does not imply an economic crisis. Instead it presents an opportunity to undertake decisions required to address some of the long-standing issues that curtailed India’s growth rates.
This is precisely the approach that the Finance Ministry has taken as it has made several big-ticket announcements over the last couple of months. These decisions also signal a big change in the understanding of the Government with respect to policymaking, primarily fiscal policies, as it reflects how economic policymaking is not just limited to the Budget.
The tax cuts are an excellent example of the same. They were announced on September 20 and the Bill for the same has been placed in the current Parliament session. This is the correct approach to address a slowdown, because economic policymaking is often more driven by the need to manage expectations. To tie the hands of a key player in a dynamic economy severely limits the policy options available.
Apart from this, despite the consensus among academics, policy-thinkers and financial journalists, privatisation nearly came to a halt post 2003. This changed last-week as the Finance Minister announced the decision of the Union Cabinet to privatise five Public Sector Undertakings (PSUs).
This makes it one of India’s biggest attempts at privatisation and only the second attempt at the same. It is worth mentioning how the only other Government with a successful record of privatisation was under Atal Bihari Vajpayee. Therefore, there does appear to be a broad economic thinking of the NDA, which is based on the principles of minimum Government, maximum governance.
To what extent will Modi 2.0 succeed in privatisation depends on a lot of factors but the five companies chosen do reveal the extent of political commitment towards the same. The question is whether it will happen before March or not.
If the Government wants to stay close to its fiscal deficit target then perhaps it would happen before March. However, this looks extremely difficult, given that it’s nearly the end of November. Realistically speaking, the fiscal deficit could be anywhere between 3.6-4.0 per cent. However, it’s not a cause for concern as the compliance effect will predominantly feature in next year’s corporate tax collections and a higher growth should result in buoyant revenue collections. But the process of tax-reforms is far from over unless we address the elephant in the room, which is the Goods and Services Tax (GST). The need of the hour is to come up with a comprehensive idea for a GST 2.0, which will streamline processes, address issues related to the technological platform but more importantly, put in place a simpler taxation structure with a lesser number of slabs and greater stability of products under each of them.
Economies are complex and indeed, we may have underperformed in the first half of the current fiscal year. However, with the moves taken, we are very likely to get back to a seven per cent level in the next financial year.
(Bhasin is a New Delhi-based policy researcher and Jhamb is a research associate with the RBI)