Boosting consumption, manufacturing and addressing farm distress, key challenges for new govt

In less than a week, results for the Lok Sabha elections will be announced. Who will win the people’s mandate still remains unclear. But, for whichever government coming to power, reviving India’s economy will be among the key challenges.

India still remains one of the fastest growing large economies. But slowdown signs are everywhere. Passenger vehicle sales tumbled 17 per cent in April, their steepest fall in nearly 8 years. While buying a car may be a discretionary spending, people have even cut back on the daily necessities like soaps and toothpastes, as is visible from the lower volume growth reported by fast moving consumer goods companies in the quarter ended March 31.

India’s Index of Industrial Production contracted 0.1 per cent in March to hit a 21-month low. Industrial output for the full year (2018-19) was 3.6 per cent a three-year low.

Earlier this month, the finance ministry said in a report that the Indian economy appeared to have slowed down in 2018-19. The Central Statistics Office had earlier revised its full year growth estimates downwards to 7 per cent from 7.2 per cent.

D.K. Joshi, the chief economist at ratings agency CRISIL, points to domestic factors for the slowdown.

“There has been a slowdown in agriculture growth, farm income, at wage growth has been weak. All this, hurts consumption demand,” he told THE WEEK.

“Then, there was the NBFC-related credit crunch. Government’s ability to support the economy through the budget is also reducing, because they are running high fiscal deficits. All these factors came together to slowdown the economy,” he further added.

India’s GDP growth, which slipped to 6.6 per cent in the third quarter from 7.1 per cent, is likely to have slipped further to 6.5 per cent in the January-March quarter, according to Madhavi Arora, economist at Edelweiss Securities. Arora is expecting economic growth to remain “sideways” in the current financial year ending March 2020, weighed down by lagged effect of tight financial conditions, sluggish private capital expenditure and possible slower public investments given fiscal constraints.

“We expect only marginal cyclical improvement in growth in FY20 amid easier monetary stance and some consumption led fiscal push in early FY20. But we see domestic structural overhang and global slowdown concerns constraining significant pick-up in growth,” said Arora.

Economists like Mohan Guruswamy, founder of Centre for Policy Alternatives, say signs of a slowdown have been visible since the last two years of the previous Manmohan Singh-led government. The savings to GDP ratio had come down for 13 consecutive quarters and the tax to GDP ratio had also fallen. He says any new government will have to regularly monitor these data points and take steps to address the issues.

“The new government will have to look at the key ratios and review them every month, hoping for improvement,” said Guruswamy, adding that measures must also be taken to increase revenues and create more jobs.

“There must be a review of revenues. You have to increase tax collection; target an increase of 10-15 per cent each year,” said Guruswamy, who was economic advisor to the Atal Bihari Vajpayee government.

The country’s largest consumer goods maker Hindustan Unilever reported a 7 per cent volume growth (number of units sold) in the quarter-ended March, compared with the 11 per cent volume growth it had reported in the same period a year ago; chairman Sanjiv Mehta stated “near-term market growth has moderated.” Sales of tractors and farm equipments also have come down, further pointing to signs of a rural distress.

“Agriculture will need policies, which create markets, curtail the role of middlemen,” said Joshi.

Over the next few months, a lot will depend on the monsoon rain pans out. If its below normal, then the government will have to step in and look at measures to create employment opportunities in the rural areas. There also need to be reforms that will ensure the farm produce get more remuneration, said Guruswamy.

The Narendra Modi-led government rolled out policies like Make In India to boost India’s manufacturing capabilities. But, that hasn’t had a huge impact, say economists given the huge number of clearances that are still required in India, said Guruswamy.

There are expectations of global economic growth slowing down this year, which may have a bearing on India’s exports, which have lagged in recent times, in comparison to imports, which in turn puts pressure on India’s current account deficit.

“India has to work on structural land, labour and financial sector reforms to improve the productivity of the manufacturing sector and boost growth. This will also improve the external sector health of the economy,” said Arora of Edelweiss.

The roll out of the Goods and Services Tax (GST) and the insolvency and bankruptcy code (IBC) implemented by the Modi government, were among the key financial reforms of the government. But economists say it is still a work in progress. The new government will have to continue to streamline GST as well as strengthen and expand infrastructure of the bankruptcy courts, which could lead to quicker resolution of stressed assets.