Illustration: Arindam Mukherjee | ThePrint
Illustration: Arindam Mukherjee | ThePrint
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The gross domestic product (GDP) growth numbers for the July-September quarter, the lowest in 26 quarters, are no surprise. Most analysts had — belatedly — forecast the bad news. It is now clear that if the government does not get its act together by Budget day, two months from now, a quick recovery from the current depths should not be expected. The economy is on a cusp from where it can swing either way. Nirmala Sitharaman is on test. 

If we get past the schadenfreude with which many analysts greet the Modi government’s mounting economic problems, for being self-inflicted, even critics will have to address the question: What should the government do? For starters, it should stop whistling in the dark. The global slowdown is not the primary cause of India’s problems, or the gap with China’s growth numbers (6 per cent for the same July-September quarter) would not have risen as it has. Nor would Bangladesh be growing at more than 7 per cent. Next, there is no point quibbling about whether this is just a slowdown or a full-blown recession. When growth drops precipitously from 7.0 per cent to 4.5 per cent in four quarters, it is for all practical purposes a recession. 

Don’t expect the quick turnaround that many analysts were forecasting until recently. The current quarter’s numbers may be no better than the last one’s if one goes by the story in the steady trickle of data, and the full year will see the slowest growth since Narendra Modi came to power on the promise of double-digit growth and achhe din (good days). The government has so far been the fastest-growing part of the economy. But with the deficit target for the full year having been crossed in seven months, this cannot continue. The Index of Industrial Production continues to bear grim tidings, as do the output numbers on the core sector. Electricity consumption has slumped, diesel consumption is going nowhere, the trade numbers point to shrinkage, and manufacturing continues to stagnate or fall across key sectors. There is no good news on either the consumption or industrial front.


Also read: India’s GDP grows at 4.5% in Q2, lowest in more than 6 years


While every downturn has a cyclical element to it, and there is some evidence of the automobile slump bottoming out, the fact is that much of the growth in reported bank credit is not going to industry, even as the scale of loan write-offs accelerates. Non-banking financial companies are unable to pick up the slack, having seen a sharp shrinkage in their credit flow. Companies are still de-leveraging their balance sheets. Till that process reaches near-completion, don’t expect fresh investment. 

While we wait for some of these cyclical factors to play themselves out to a receding horizon that stretches now to three or four quarters into the future, deeper structural issues wait to be addressed. Agriculture has to deal with the fundamental issue of poor productivity and inadequate domestic demand (in part a result of stagnant rural wages). The government’s tax revenue base is shot through with holes, and no one seems to know how to fix the good and simple tax’s problems. The strength of services exports keeps the rupee pegged at a level at which manufacturing exporters find themselves unable to compete in export markets. Reform of the public sector is a coat that hangs yet again on the peg of what happens to the employees of unviable firms. Finally, as one business leader after another capitulates — from an Ambani to a Ruia, and from a Thapar to a Subhash Chandra — the capacity of India’s famed entrepreneurs to lead a growth charge is increasingly in question. 

The best advice one can give is that this is a crisis that should not be wasted. The Modi government has acted so far as though it can ignore the bad economic news and coast along on its political and social agendas. It would be a pity if it continued to do that. A crisis is when a government can expect people to make some sacrifices for the larger good. The danger of doing nothing is that growth of 6 per cent or less becomes the norm, not the unacceptable. 


Also read: Manmohan Singh has economy advice for PM Modi — get rid of suspicion, trust Indians


 

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6 Comments Share Your Views

6 COMMENTS

  1. While Modi cleared cobwebs of the past in many areas including the most intractable issue of Art 370, the fundamental structure reforms to get out of the quagmire of the old socialistic and control mind set of the Nehru Indira days has not found any salience at all with Modi. In fact, he seems to believe in it but wants better efficiency out of it and without corruption, of course. Demonetization seemed to be a beginning of a string of well ordered reforms but it just stopped at one episode. In Modi, we have a leader who has the political capital to demolish old structure and build a fresh one which will give impetus to the sustained economic growth. If Modi fails in his economic reforms, it would be a disaster as we may not get another leader of his standing in near future. India wasted 10 years under Man Mohan Singh and surely India can not afford to waste another 10 years under Modi!!

  2. There’s been a dip in India’s fortunes along with China &rest of the world. Some things in the economic world defy understanding,why despite so much of money printing is inflation absent in the developed world .How can Japan & European economy have negative interest rates. If we grew in excess of 8/ ,from where have the structural problems crept up to drag us to 4.5,and so on. And amazingly the stock markets are trading at their lifetime highs.

    • (1) The stock markets in India are showing irrational exuberance; (2) the lack of inflation in the developed world is due to highly efficient supply chains and reasonably fair competition; the burden is passed onto less discerning economies and largely unfair societies willing to supply to developed countries at low prices even if that means paying low wages to their own workers (exploitative capitalism). The West does it in a more refined manner with low corruption and lack of black money in the system keeps inflation in check, and corporates compete by creating low wage jobs (till workers) but paying huge executive salaries and bonuses; (3) if the interest rates are low, so are the savings rate. Most middle class is living on credit in the Western world. It is consumption all the way on borrowed money; a system in which all stakeholders think they are winners. Summing it up, the world today is so interconnected, that financial and economic integration works just like nuclear deterrence. My theory is if that were not the case, China and US would have been at war by now.

  3. Does the solution only lie with Modi? Or is it a failure of the society itself? Are we putting too much of blame on his government? Would the Congress have done better if the were in power? After all, the current NPA problems of the banks started under MMS with a free for all spending.

    What about Indian schools and Universities? Railways?

    I just checked on Google maps. It takes 18 hours to cover 613km between Allahabad and Bhopal by road! That is an average speed of about 30 km/hr.

    While Modi should take a fair part of the blame, I suspect that it’s only part of the story. It’s a failure of society as a whole.

    As a small example: if you want to put more money in the pockets of the poorer people, pay them more. This as citizens.

  4. Too generous an assessment. More than five years ago, the advice should have been : This is a rare, stellar mandate the government should not waste. One million new job seekers each month, joining an already interminably long queue, should provide a democratically elected government with all the incentive it needs to place the economy at the centre of its concerns. We are still debating cyclical vs structural, slowdown vs recession. The only advice that will be heeded comes from the EVMs. Jharkhand should give us a better idea.

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