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What is the issue?
- The latest report on first-quarter GDP growth to be 5.7% as against the expected 6.5% to 7% comes as a shock.
- While demonetisation and GST are highlighted to be the prime reasons, a closer look at the economy brings out various other significant factors behind the slow down.
What factors have failed to promote growth?
- De-stocking of goods prior to GST, and the impact of demonetisation are factors which directly impacted the growth rate.
- However, there are other factors which failed on their purposes against the expectation of promoting growth. These include -
- The remonetisation process after the demonetisation drive should have brought the economy back into growth tract.
- It should have also opened up avenues for expressing the consumer demand which was cramped during the demonetisation phase.
- Government had also made unrestricted spending which is supposed to have boosted the economy.
- Also, it has been a year of good monsoon and favourable commodity prices.
- But all these failed to produce favourable results, further calling for serious attention to the causes behind slowing growth rate.
What are the other reasons?
- The twin balance sheet problem with mounting debt of corporates and the resultant impact on banks' conditions.
- This has fell sharply on both investment and lending especially with the declining profitability of the power and communications sectors.
- Reduction in farm revenues because of falling non-cereal foodgrain prices and resultant compressed demand.
- Also, fiscal tightening by the states to keep budget deficits on track added to the problem.
- A holistic view reveals that there is a more serious demand and hence investment crisis which is crippling the economy at present.
Are conditions favourable for reviving growth?
- The rebound of present economic situation is doubtful, given various factors and conditions.
- The gross fixed capital formation is weak, further reducing the possibility of any investment revival.
- Given that government has already spent heavily, any further investment would only retard India’s fiscal consolidation efforts.
- Also, various indicators on the manufacturing sector do not seem favourable for promoting economic growth.
- RBI's industrial outlook survey brings out the unfavourable demand conditions across parameters and especially on capacity utilisation, profit margins and employment.
- Also, deteriorating consumer sentiment are not promising for a demand rebound.
What lies before the government?
- Government could think of relaxing its stand on fiscal consolidation and make increased capital spending to revive the economic situation.
- Government should tap the optimistic potential of the buoyant services sector and utilise the opportunities it holds for economy and job creation.
- Also, it should focus on the potential small and medium enterprises and correct the negative effects of GST on them.
- Above all, it is high time that government addresses the slow growth of bank credit and the debt overhang problem.
- Only this will ensure a better investment climate and boost manufacturing.
- Focus should shift from short-term effect of structural reforms such as GST and demonetisation and turn to the larger investment and demand crisis.
Source: Business Standard, BusinessLine
