Temporary impediments

But then, where did it exactly slow down. Disaggregated figures of GDP growth provide a hint. Surely industrial growth has been lagging behind for quite some time. It was just around 1 per cent and often slipped into the negative zone. Industrial capacity utilisation has been around 74-75 per cent on an average. Even among the industrial segments, the capital goods sector had been showing lacklustre performance. It also continued to show the same old riddle: it either grew heftily or it was crashing down deep into the negative. However, the continued slack in the capital goods sector revealed one major weak spot. Investment has become a distant star to be tracked with a telescope. That is because capacity utilisation is low and the urge to make fresh investments is just not there.

Coupled with this, the high-interest rates are damaging the investment sentiment. Why? High-interest rate means that investors will have to have "interest rate-plus level of returns". With high-interest rates, which are the financing costs of investments, the investor got to earn more than the interest pay-outs to make that investment viable. So, take for instance, at 12 per cent interest rate, return expectations would hover around 17 per cent-plus to make that investment viable at the minimum. That is a difficult game at the present moment.

Why? Because, in a situation where the industry is saddled with underutilised capacity, the pricing power has shifted from the sellers to the buyers. That is, industry and producers will not be in a position to jack up prices to recover more from their investment. This is further vindicated by the inflation figures which have been given out recently.

The disaggregated sectoral inflation figures reveal that manufactured goods prices have hardly moved. In fact, these have in patches fallen, when inflation has been guided only by the rise in prices of select food articles. Thus, the manufacturers have not been able to meet the expectations of a price rise to fulfil their hopes of higher returns.

Secondly, there is another aspect to this growth slowdown. The government is beginning to suffer from its own success. The talk about GST introduction, for a long time, has depressed consumer sentiment. Now that the GST is in place and its reach is spreading further afield, the consumer is getting rather inhibited in spending. Despite the talk of the rates being revenue neutral, its spread appears to have caught large swathes of the economy which till now did not simply pay taxes. The taxes are thus inhibiting spending in these areas, there is a reason to believe. Maybe, once again, the move to formalisation and tax compliance driven by the spreading GST network, covering even smaller and tiny sectors, are proving to be disruptive forces. At least for the time, these successes of the tax spread will hurt the functioning of the economy and thus drag the growth levers down.

Thirdly, although it is not yet clear if the new system of indirect taxation is able to spread far and wide and tax collection increases heftily, it cannot but have an impact on consumer demand and spending. After all, tax revenues also mean drawing down the liquidity from the hands of consumers and investors and transferring these into the hands of the government. And the government is not always the best spender. Nor does its spending have the best impact on the economy. Some very rigorous recent studies on the impact of public spending by RBI scholars do give such indications.

The successful rollout of the GST system will eventually result in domestic consumption going down. In this eventuality, the government has to introduce fresh consumption demand. But there lies the riddle: higher government outlay might not be so beneficial. Additionally, emphasis on fiscal prudence would remain a check on this. So, the government would be hamstrung in its efforts to spend and introduce a compensatory demand into the economy. But then, what is the way out. The short and easy step could be to turn the screws on imports. There is a reason to believe that for at least last three years, imports were rising and a good part of domestic demand was being met from these imports. In certain sectors, this had become pronounced. Take for example steel.

Until last year, the steel industry was facing a serious situation of a lack of demand. With China facing a glut of steel production, Chinese steel was being dumped into the world, including the Indian markets. With complaints from the Indian steel industry rising to a cacophony, along with steel companies increasingly defaulting on their loans to banks, the government imposed a duty on steel imports. In a year's time now, the steel industry has turned around. Its production is rising, credit disbursement to steel units has once again resumed and the industry is no longer on the sick list.

Similarly, for electrical goods. Go to a market in India and try to buy simple and elementary electrical appliances manufactured in India, the chances are, you will not find one. What you will find are well known Indian brands for electrical goods selling Chinese made appliances. They simply stamp their brand names on Chinese imports. That might be lucrative for individual companies, but a bit disastrous for the industry. Thus, what are the possible steps the government could quickly take to address the incipient problem of slow down now?

For the short term, cut down interest rates, even at the cost of raising the inflationary pressures a bit. The chances are that with the favourable monsoon and good supply lines, prices won't shoot. Secondly, seek ways of compressing imports of consumer items. This can be done by partly raising tariffs and by partly selectively imposing non-tariff barriers. These could then translate into higher demand for domestic items. Thirdly, the government may consider to speed up its investment programme. Already, several investments in the infrastructure sector have been lined up. Let these be speeded up a little. That may not immediately jack up the deficit, as these would have been budgeted already. Lastly, the government should consult a government psychiatrist, if there are some.

The present government is creating a crisis where there is none. A small little sluggishness in growth need not become a fully-blown out crisis. It is like taking every decimal point in the national income statistics too seriously. An economy is an organism, it can sometimes feel fine; it can also sometimes feel somewhat feverish.

So then, the advice to the government from laypersons would be, introspect about your thinking process, take a few modest steps (instead of always thinking of Big Reforms) and with luck, we should get over the slack.