Challenges of the
sliding economy
G.Srinivasan
As the domestic economy
traverses the crucial
second-half period, the
auguries do not seem
encouraging at this midpoint
with a mixed
scenario of macro-economic
fundamentals that largely shape the
overall growth for the whole year.
The sliding economic growth
stems from a medley of benign and
malign factors even as the authorities
might derive smug satisfaction that
inflation has largely been tamed and
agricultural production is not posing
any formidable challenges as it was
during the first two years of the Modi
Government when there was a backto-
back drought resulting in rural
distress and clamour for farm loan
waivers from state after state in the
ensuing year.
With fuel prices aligned to
gyrations in global prices on a daily
basis, the consumers of all sorts begin
to feel the pinch of the exorbitant cost
of fuel even as the government did
not refrain from bragging its victory
over the slaying of inflation dragon!
It is also an irony of inexorable hue
that at a time when the average
global crude prices had crashed from
$ 108.05 to $ 53.83 a barrel between
May 26, 2014 when the Modi Sarkar
assumed office to now, the consumers do feel hoodwinked that
the benefits of lower global oil prices
had bypassed them with the greedy
government pocketing the gains and
slapping specific excise duty on both
petrol (from Rs 9.48 to Rs 21.48 a
litre) and diesel (from Rs 3.56 to Rs
17.33 a litre). As fuel fires not only vehicles and the economy but withal
has the unenviable upshot of inching
up retail inflation with most of the
real sectors of the economy suffering
the concomitant spike in fuel prices in
their activities as their cost goes up.
Though the government has the
Hobson's choice of not letting tax on petrol reduced as its competing
demands for other infrastructure
outlays are equally weighty, the
consumers and real sector players
need to be sensitized to the
conservation techniques and use of
alterative cost-effective substitutes
such as renewable which need to be
aligned to the affordability issue of payers. This is no doubt easier said
than done but it must perforce have
to be accomplished with a minimum
of discomfort and maximum of
outcome to the overall efficiency of
the economy, going forward, analysts
say.
Even as the gains to
growth, efficiency and tax
buoyancy over the
medium term from the
recent implementation of
GST are indubitably
recognized, RBI warns that
near-term uncertainties
concerning revenue
mobilization thereof could
impact fiscal consolidation
at both Centre and State
levels.
There are, no doubt, several
factors for the pronounced economic
growth slowdown during the first
quarter of the current fiscal when
there was a sharp drop in gross
domestic product (GDP) growth to
only 5.7 per cent.
As they say disturbing tidings come
in battalions, the growth decline
came following the Reserve Bank of
India (RBI) released data disclosing
that well-nigh 99 per cent of the
demonetized notes of high
denomination had come back to the
system. To complete the woes of the
people as if all the pains they had
endured on account of
demonetization meant derisory
returns in terms of black money
unearthed, there was also the added baleful growth impact of de-stocking
due to the implementation of the
Goods and Services Tax (GST)
effective from July 1.
It is only growth in government
final consumption expenditure that
was supporting the growth impulses
in the economy when other
constituents that ought to have
contributed their mite remain
hamstrung for one reason or
another.
Besides government expenditure,
the two principal autonomous drivers
of demand growth include fixed
investment or gross fixed capital
formation (GFCF) and the balance of trade. Of these, GFCF plunged sharply
to only 1.6 per cent in the first quarter
of the current fiscal, down from 7.4
per cent in the comparable quarter of
2016-17.
The slippage seems sharper in the
index of industrial production (IIP)
data, which reveals that production of
capital goods actually plummeted by
3.9 per cent in the first quarter this
fiscal. The decline in June 2017 was by
as much as 6.8 per cent with the fall reflecting the deep slowdown in
private investment. It is also an
agonizing fact that private
investment, which accounts for the
bulk of investment, came down from
27 per cent to only 21.9 per cent in
2016-17 with the trend persisting
further down. Obvious obstacles for
private investment decline include
the logistics and power problems, the
intractability of doing business and
the laggard pace with which solution
is being hammered out for
overcoming non-performance
advances/loans (NPAs) particularly in
public sector banks.
Added to this is the worsening external trade balance. This negative
trade balance has gone up by a
whopping 295 per cent in the first
quarter this fiscal compared to the
comparable quarter of 2016-17. The
continued slow growth in export but
relatively high growth in imports is
worsened by appreciation of the
exchange rate in recent months
which rendered import cheaper and
exports a bit expensive in relative
terms.
Reflecting the widening trade
deficit, which is the dominant
component of the current account
balance, the country's current
account deficit (CAD) during the first
quarter of the fiscal, as reported by
the RBI data in September, revealed
disturbing spike shooting up sharply
to $ 14.3 billion or 2.4 per cent of
GDP, a four-year high from $ 400
million just a year ago. The RBI
ascribed the steep hike in CAD mainly
to higher trade deficit triggered off by
a larger spurt in merchandise
imports, particularly by inessential
items like gold.
Interestingly, figures put out by the
Department of Commerce on August
imports showed that gold imports
were 69 per cent higher year-on-year
basis at $ 1.89 billion, prompting the
mandarins in the Ministry of Finance
to intercede with their counterparts
in the Commerce Department to
consider whether gold could be taken
out of the purview of duty-free import
under the Free Trade Agreement
(FTA) India had inked with a few
South-East Asian neighbors. Thailand
and Malaysia apart, the recent
dramatic spurt of gold import from
South Korea under the FTA had
rattled the authorities to weigh this
option which may not curry favor with
the trading partners of FTA.
Be that as it may, the Annual
Report of the country's central bank,
the Reserve Bank of India (RBI),
released in late August, has at long
last laid bare the huge challenges and
humongous difficulties the economy
is faced with at this juncture, even as
it observed that real gross value
added (GVA) growth for the domestic
economy is projected to rise from 6.6
per cent in 2016-17 to 7.3 per cent in
2017-18, "with risks evenly balanced".
With 99 per cent of the annulled
high denomination notes having been
brought back to the system, the fight
against black money did not spawn
the much-vaunted outcome. That is
why the apex bank has conceded that
the transient impact of
demonetization notwithstanding, the
sluggish growth of industries and fixed capital formation remain areas
warranting "priority in policy
attention".
Growth moderated in 2016-17 due
to slowdown in gross capital
formation as waning business
confidence and flagging
entrepreneurial energies took their
toll on the appetite for new
investment.
Enumerating a plethora of
challenges for States, RBI
said the announcement of
farm loan waivers could
vitiate credit culture and
deter borrowers from
repayment, besides
impacting credit discipline.
With the RBI expressing its
views on farm loan waivers
by States so strongly, its lack
of equal vehemence in
condemning the loan
default of corporate houses
and those who borrowed
heavily to end up as
fugitives abroad is
lamentable. On the other
hand, the RBI has been, as a
regulator, wrestling with
public sector banks (PSBs) to
resolve their balance sheet
problems far too long with
scant success.
But both government and private
consumption did the heavy-lifting
to prop up aggregate demand.
It conceded that the industrial
output seem to have been impacted,
albeit transiently, by demonetization
even as IIP growth during November
2016 to 2017 was 2.6 percentage
points lower than in the predemonetization
period (April-
October, 2016).
The report gave due praise to the government as the fiscal
consolidation during 2016-17 was
accomplished through the strategy of
revenue augmentation rather than
expenditure compression,
"exemplifying improvement in the
quality of public finances".
The reduction in the current
account deficit and external debt and
build-up of foreign exchange buffers
fortified the resilience of the external
sector in 2016-17. However, the Bank
cautions that the announcement of
farm loan waivers by a few States and
the implementation of the 7th Pay
Commission with the likelihood of
adoption at the state level have
implications in terms of fiscal
slippages with upside pressures to
the future course of headline
inflation.
Even as the gains to growth,
efficiency and tax buoyancy over the
medium term from the recent
implementation of GST are
indubitably recognized, RBI warns
that near-term uncertainties
concerning revenue mobilization
thereof could impact fiscal
consolidation at both Centre and
State levels.
Enumerating a plethora of
challenges for States, RBI said the
announcement of farm loan waivers
could vitiate credit culture and deter
borrowers from repayment, besides
impacting credit discipline. With the
RBI expressing its views on farm loan
waivers by States so strongly, its lack
of equal vehemence in condemning
the loan default of corporate houses
and those who borrowed heavily to
end up as fugitives abroad is
lamentable. On the other hand, the
RBI has been, as a regulator,
wrestling with public sector banks
(PSBs) to resolve their balance sheet
problems far too long with scant
success.
Unless and until the apex bank
cracks the whip on all those who do
not abide by the rule book, it would
be difficult to inculcate the fear of
reprisal against defaulters and the
show would go on with scant sense of
seriousness, critics contend.