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Challenges for the economy

Challenges for the economy

The Modi Government must perforce devote undivided attention to recover from the glitches and bottlenecks that stymie the country's growth story, which had been disrupted by the pervasive financial tsunami that struck a lethal blow to the global economy way back in 2008, with contagious consequences to all globally-linked economies, including India. Ever since it came to power in May 2014, the NDA government was busy wrestling with repairing the various legacy issues left over by the decade-long UPA dispensation particularly as the latter's second tenure (2009-2014) was marred by malfeasance and shenanigans.

With the NDA government in its penultimate year, before it once again faces the electorate in the General Election in May 2019, it has no alibi for turning around the economy other than showing how it ran a corruption-free economy that focused neither on growth nor on employment generation. This won't suffice or satisfy the craving Indians for a modicum of decent living standards and who set store by the 'acche din', promise for all that remains unredeemed up till now. While the first two years of the NDA government suffered a back-to-back drought with farm sector performing worst to aggravate rural distress, most of the growth that should have arisen from the secondary sector got stuck in the twin balance sheet problems of the corporate sector and the country's predominantly public sector banks. The performance of the index of industrial production (IIP) over the couple of years was nothing to write home about as it continues to be the Achilles heels of the Indian economy for far too long.
As the domestic economy is about to enter the crucial second half of the current fiscal, humongous challenges lay ahead for the authorities to preclude slippages in growth as also to keep inflationary risks from going out of control. Given the ground realities of the first quarter performance when growth slowed down to its 13-quarters low of 5.7 per cent with much of the slowdown ascribable to the abrupt announcement by the Prime Minister to demonetise high denominational notes on November 8, 2016, which hit the growth potentials and prospects of the last quarter of the last fiscal and the first quarter of the current fiscal due to the shock to informal cash-reliant sectors. There are concerns now over a general price spike spoiling the growth chances. Inflationary pressures are returning, not imperceptibly, but tangibly, as fuel price spikes have a direct unbearable bearing on both the retail and wholesale price indexes, causing a severe strain on the struggling masses.
The latest Annual Report of the Reserve Bank of India said that the transient impact of demonetisation notwithstanding, economic growth moderated in 2016-17 due to a "slowdown in gross capital formation as waning business confidence and flagging entrepreneurial energies took their toll on the appetite for new investment." On the farm front, record food grains and horticulture production, facilitated by the normal monsoon as well as a considerable hike in pulses' minimum support prices, augmented the sector's growth during the year.
On the other hand, deceleration in services gross value added (GVA) across all sub-sectors barring public administration, defence and other services, moderated the overall GVA growth. The slowdown was marked in the second half of the last fiscal as construction and real estate sectors, which relied to a large extent on cash transactions, were severely jolted by demonetisation. The growth in industrial GVA also decelerated from a year ago, dragged down by a slowdown in manufacturing and mining, even though electricity generation accelerated. The Bank does not gloss over the prospects for the manufacturing sector in the current fiscal which remains uncertain in the short-term in view of the implementation of the goods and services tax (GST).
On inflation, it said falling food prices, especially those of vegetables in the wake of demonetisation in November 2016, resulting in rapid disinflation in the food group drove down headline inflation month after month –barring February and March—to a low of 1.5 per cent in June 2017. Eventually, the year 2016-17 ended up with a subdued inflation of 3.6 per cent in the final quarter, undershooting the Central bank's projection of five per cent. In the current fiscal, the inflation scenario may not be that benign, the report said adding that the announcements of farm loan waivers and the implementation of the Seventh Pay Commission recommendations with the likelihood of adoption at the state level have implications in terms of fiscal slippages with upside pressures to the future course of headline inflation. On the whole, headline inflation is presaged in the range of 2.0-3.5 per cent in the first half and 3.5-4.5 per cent in the second half of 2017-18.
The apex bank admits candidly that growth during the current fiscal too is again likely to be consumption-led with continuing remonetisation facilitating a pick-up in discretionary consumer spending, particularly in cash-intensive segments of the economy. The Bank rightly flags off the genuine concerns as to whether consumption-led growth is beneficial for economic growth or acts as a drag remains to be "assessed, particularly in view of the fact that rates of growth in investment and net exports have not been very impressive in recent years." On the positive side, government spending is robust, cushioning the impact of a slowdown in other constituents. Besides, reduction in bank lending rates post-demonetisation should bolster investment demand of stress-free companies, the apex bank ardently believes, belying that the ground level risk-aversion of public sector banks plagued with balance sheet woes of having burnt their pockets by over-extending to corporate houses on their own or under duress in the past.
Given the mixed scenario at this mid-point of the year, it is time the mandarins in the Finance Ministry mulled over the very limited options to keep the economic engine at least in half-throttle through purposive policy interventions with result-oriented focus, lest that the accompanying high growth will have a salutary impact on all the stakeholders. With GST in place, the Centre's forthcoming Union Budget for 2018-19, the final year of the present government, would be a lean exercise so that it can right from now at the preparatory phase focus on how to generate growth in the real sectors of the economy as also employment to legions of people for a better future.
(The views expressed are strictly personal.)


G Srinivasan

G Srinivasan

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