We are still not in a recession and while concocting solutions, policymakers must comprehend that short-term measures can only make a dent while dealing with structural problems. Concrete measures are needed to fix problems that ail the economy permanently
It seems like one more shocker has hit the Indian economy as the Gross Domestic Product (GDP) growth has gone below the five per cent mark and touched a worrying six-year low of 4.5 per cent. The Index of Industrial Production (IIP) that has been at its worst in the last eight years is further expected to come down in the following quarters. But has this downturn just started or were the warning signs there much earlier?
The self-reinforcing spiral in the rural economy, the manufacturing slump, low-wage pressures in the economy, ambiguous trends of consumption, banks burdened with bad loans and exports at their lowest, have together contributed their bit to the fiscal woes over the years. There is an ongoing debate on whether the slowdown emanates from the supply side or the demand side growth shock. All signs point towards the dwindling economic fundamentals, be it domestic consumption, private investment, Government spending, foreign consumption or exports. Unfortunately, the Government, too, is exhibiting signs of nervousness and the situation is being termed as a “financial emergency.”
Hence, it is mandatory to dig deeper in order to get some clarity on the issue. Is it justified to categorise the current deceleration as “economic sluggishness” or could it be considered “episodic and anecdotal”? Why is there a prolonged fall in the GDP? Is consumption at risk? What is the plausible role of the Government in all this?
It has been discussed at various platforms that the current demand slowdown cannot be called cyclical which can be corrected through monetary or fiscal measures such as slashing interest rates or a tax-cut. Rather, it is a result of having missed the manufacturing export-led growth along with effective deployment of structural reforms, followed by the shock of demonetisation, a stressed banking sector and faltering implementation of the Goods and Services Tax (GST) which has impacted the informal sector the most.
Until recently, the Government had remained in denial mode, especially in the tempting environment of hiding behind the global economic slowdown due to trade conflicts and geopolitical tensions. Developing nations can sustain the growth trajectory mainly by inculcating the investment-driven realm. Hence, it is even more vital to recoup high levels of investment, for which corporate tax cut may not be an adequate solution.
Former irrational excitement during the high growth period of 2002-08, followed by the shock of the global financial crisis in 2008, are the two deep-rooted fundamental triggers of today’s corporate distress/indebtedness. Undisputedly, the Indian economy is confronting problems from multiple spheres.
Needless to mention, some parts of it are a direct derivative of the current global economic deceleration but decisions like demonetisation, the bad loans crippling banks, the crisis the Non-Banking Financial Company sector is facing, the Comptroller and Auditor General (CAG) and Central Bureau of Investigation (CBI) probes actually worsened the situation, which in turn impacted consumption and investment (hence overall aggregate demand) far more severely.
The recent corporate tax cuts elicited a euphoric response from the financial markets and got the much-needed mass media attention. But, was this adequate to contain the falling output demand? Maybe not at least in the short-run. Economists like Renu Kohli and Deepak Nayyar have already debated this move and pointed out that it will only add to rising income inequalities. They have principally not supported it, either in theory or in practice. Certainly, there could be more effective ways to incentivise consumers to stimulate the final demand of goods and services.
Further, it is argued that the dream to convert the informal economy into a formal economy has actually impacted domestic consumption negatively. Perhaps, a combination of demand-side push factors along with real efficiency-productivity reforms could provide the required boost to the ailing economy in the Narendra Modi-led Government’s second term at the helm of affairs in the country?
Also as proposed, the corporate tax cut may be essential but not sufficient for a long-term investment boost in India. Overall, the current predicament could be perceived as an abysmal structural matter rather than simply a short-term one. Maybe the Keynesian philosophy (to increase fiscal/Government expenditure) that has the precedence of successful growth story even in the case of India between 2014 to 2017 and as propagated during the great depression of America, could be a sustainable way forward.
Some economists suggest that India is at the brink and at this point in time. So supply-side measures like corporate tax cuts (including the merger of some public sector banks, recapitalisation, loan melas and moratorium on repayment of Micro, Small & Medium Enterprises loans) may not help. Pull from the demand-side like rural-led growth, structural transformative reforms such as inland acquisition, banking regulation, labour and so on could be the only option to sail through.
Additionally, it is equally important to mention that the Government should actively develop the manufacturing sector with an eye on export markets to improve the situation.
Thankfully, we are still not in a recession and while concocting a mishmash of solutions, policymakers must comprehend that short-term measures can only make a dent while dealing with structural problems. More concrete measures are needed to fix the problems that ail the economy permanently. One hopes that the ongoing Winter Session of the Parliament will bring forth the Insolvency & Bankruptcy Code and Banking Regulation Act as the key economic tools to resolve the persisting slowdown pressures more effectively.
(The writer is Assistant Professor and Senior Research Scholar, DRC/ FMS, University of Delhi.)