The economic slowdown is clearly the talk of the town, from boardrooms to bazaars. While financial markets and businesses are looking to the government to salvage the situation which is now hurting industries ranging from automobiles to soaps, shampoos and biscuits, nobody really knows what is needed to come out of the mess.
India’s central bank on its part has been deploying its monetary tools and has aggressively reduced rates by close to 110 basis points in the current calendar. There is a clamor for accelerating credit growth and the recapitalization of government banks was seen as an effort in this direction, but the slower credit growth is the fallout of the slowdown rather than its cause.
A large scale spending push by the government could have helped but, being constrained by the fiscal discipline roadmap, that did not happen in the Union Budget. The market is looking for quick fix solutions like a GST rate cut and the like, but such short-term nudging misses the bigger picture.
It’s naïve to assume the current slowdown is a cyclical one. Instead, it is more structural in nature and therefore needs a radical policy shift, or else the problem will only get worse in future.
Simply put, the twin drivers of the economy till now, which were high growth in private (household) consumption led by a declining household savings rate and high growth in government spending led by high consolidated fiscal deficits, may be running out of steam. We do not expect any imminent revival in private investment. Also, the NBFC ‘liquidity’ and ‘solvency’ issues could persist and even percolate into other parts of the financial system, given the deep connection among real estate developers, housing finance companies, banks and bond markets.
A substantial decline in wage growth, both rural and urban, in recent times resulting in lower household savings has possibly slowed down growth in real per capita income, which is holding back demand.
Former RBI governor Raghuram Rajan recently said that “stimulus of one kind or the other would not be useful in the long term, especially given India’s fiscal situation”.
While a tweaking of the GST rate or a scrap page policy for older vehicles can bring short-term cheer for the markets, it will not address the structural issues that ought to be dealt with on a war footing.
It is common knowledge that India is not generating enough jobs for its teeming millions and growth in income is stagnating. Let us go back to the root cause of these problems – the structural composition of the Indian economy. India, despite being a developing economy, has adopted a service-led growth strategy by bypassing the industrialization effort, with the share of services at 54 percent of the economy.
This has left India incapable of coping with an impending demographic wave, increasing the risk of the economy falling into a low income trap with scores of jobless youth. This is already beginning to hurt us and the current slowdown is partially attributable to this phenomenon.