India’s deepening slowdown has now left the economy on the verge of stalling.
What are some major facts?
The latest GDP estimates show year-on-year growth in the April-June period slid to 5%, the slowest pace in more than six years.
The private consumption spending slumped to an 18-quarter low, with the expansion decelerating sharply to 3.1%, from 7.2% in the preceding quarter and 7.3% a year earlier.
Gross fixed capital formation (GFCF), a proxy for investment activity, grew only a 4% which is less than 13.3% growth it posted a year ago.
What did the RBI’s annual report reveal?
Indicators of GFCF had shown either moderation or contraction in the fiscal first quarter.
It pointed specifically to gross value added (GVA) by the construction industry, which government data revealed had eased to a 5.7% pace, from 9.6% in the year-earlier period.
With demand for manufactured products ranging from cars and consumer durables to biscuits having sharply diminished, manufacturing GVA growth plunged to an eight-quarter low of 0.6%.
In fact, save mining, electricity and other utility services and public administration and defence, all the five other contributors to overall GVA weakened from a year earlier.
RBI observed in its July 2019 survey that the consumer confidence has worsened appreciably with 63.8% of respondents expecting discretionary spending to stay at the same level or shrink one year ahead.
The comparable reading in June 2018 was 37.3%.
What are, and could be the actions of the government?
The government is cognizant of the gravity of the situation which is evident from its recent slew of policy pronouncements.
It tweaks the investment norms to draw more Foreign Direct Investment (FDI), moves to relieve the debilitating sales slump in the auto sector and a sweeping consolidation of public banks.
Any beneficial impact from these measures will take time to feed into the economy.
Time is a luxury that the faltering economy can ill afford, especially given the global headwinds.
With the farm sector still stuck in a low-income trap and this year’s monsoon rains leaving some parts flooded and others deficit, rural demand is unlikely to return any time soon.
The RBI’s four interest rate reductions since the start of 2019, failed to incentivise credit-fuelled consumer spending and business investment to any significant degree.
With limited fiscal headroom to try and prime the pump with increased expenditure, big, bold structural reforms may be the only way out.
The government must lose no time in consulting with the widest possible spectrum, including the Opposition, and then implement the agreed-on reforms prescriptions to reinvigorate demand and investment.
