Pessimistic outlook

In the foreground of the annual Fund-Bank brainstorming sessions in Washington, the International Monetary Fund (IMF) has been the latest to decipher India's slowdown. It has cut down growth forecast by close to one percentage point. But is predicting a rebuking in 2020 to 7 per cent growth.

This is the season for downgrades. Agencies are tumbling over each other to downgrade India's potential growth rates. IMF has brought it down, so has our own Reserve Bank, followed by the World Bank and even some credit rating agencies.

In the run-up to its annual meeting in Washington, the Fund has cut India's growth to 6 per cent for 2019-20 from 6.8 per cent estimated previously. Nonetheless, the Fund is less pessimistic than others and expects India to bounce back to a 7 per cent growth trajectory next year. A bit of a silver lining there.

The fact is that nobody has a clue. Let us face facts. No one has any access to primary data on the Indian economy other than the official agency — the Central Statistical Organisation (CSO) and to an extent the National Sample Survey Organisation (NSSO). Only these organisations have the network to collect information at the ground level to make at best an estimate of what is happening, which should be taken more as indication of the trend rather than taking these to be true to the last decimal point.

It is in this context that the figures should be used for any discourse. Admittedly, CSO's last estimates set quarterly growth rate several notches lower than the expected levels. But then, the private sector organisation of automobile manufacturers were screaming from rooftops about falling sales. It was possible to ignore that cry of falling demand for automobiles for a while. After all, car sales cannot grow at the kind of feverish pitch at which these were rising for years. It was to slacken sometime, and that day had arrived.

But, unfortunately, other indicators were also flowing in carrying bad news. Fast-moving consumer goods (FMCG) showed slowing demand growth and soon inventories were piling up. There were reports that even five-rupee packs of biscuits were not moving as these used to.

Finance Minister Nirmala Sitharaman surely has a problem in hand, and she realises it, going by the reactions and moves to overcome the slowdown.

What is worse, she has too many self-proclaimed advisers. Everybody is advising the minister about what should be done, what not and what are the fundamental causes.

Immediately after the announcement of the so-called Nobel for economics, Abhijit Banerjee waxed eloquently on the dire straits the Indian economy is in. Above all, he was, as it has become fashionable, questing the veracity of the Indian data, though in the same breath he was referring to the findings of the NSSO about consumption expenditure fall. Raghuram Rajan has been persistently talking about the "dark depths" that India is plumbing, visible from his chair in Chicago.

The experts that they are, it is difficult to repudiate their renown. On the face of it, IMF's formulations on the global economy as well as India appears quite nuanced. Speaking in the context of the release of the annual World Economic Outlook (WEO), chief economist Gita Gopinath, has cautioned about the dangers of a fiscal overreach for reversing the slowdown.

IMF is, however, projecting a return to 7 per cent growth in 2020 on the basis of the accommodative monetary policy and the incentives provided by the deep cuts in corporation tax. No doubt that the tax concession adding to the coffers of the companies should take a much longer time to work itself out rather than addressing the slowdown immediately.

Three points appear to hit the nail straight on the head in its analysis and isolating the causes of the current slowdown.

First, IMF has correctly identified the financial disruption – particularly the collapse of the parallel financing structure it had placed that is the non-banking financial companies – to be one of the triggers for the sudden slowdown. As a matter of fact, the drying up of such funding in particular to real estate companies has played havoc for completion of the projects and their final sales to buyers. There was a virtual credit freeze.

Incomplete housing projects, strewn over all the metropolitan and large cities, meant demand for a large number of downstream industries could not come to fruition. Electrical goods, consumer durables and textiles had suffered as a result.

Secondly, its economic research deputy director, Gian Maria Milesi Ferretti has put India's current slack in its proper context. Going by the reports, he said that the overall growth in India still remains very high going by the experience of the global economy. At around 6 per cent, India's economy remains a very strong performer. However, its fast pace was important given the population and the level of income. For the sake of generating an adequate number of fresh jobs, faster growth is imperative.

Thirdly, the IMF report reiterated by its chief economist, the hidden fiscal dangers need to be taken into account. While the revenue projections remain "optimistic", there is at present no indication how the loss of revenue from sharp cuts in corporation tax – which remains one of the fundamental sources of revenues – are to be recouped to maintain fiscal balance. On a very optimistic presumption, this could still be argued to be compensated from higher growth.

However, the most damaging effects of the new-fangled GST system on domestic trade is what seems to be destroying a good deal of economic activity, coming as it did on the heels of the demonetisation move. Trade in farm goods has been obliterated, according to some reports, which had depressed the prices of farm products. Textile industry has similarly been hurt by the GST system and off-take has slumped.

The government should put its ears to the ground and comprehend the problems being faced by the informal players. Listening to them might become much more instructive than hearing the profundities of economists perched in academic towers.

(Views expressed are strictly personal)