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October 2017 Edition of Power Politics is updated.  Happy Diwali to all our subscribers and Distributors       October 2017 Edition of Power Politics is updated.   Happy Diwali to all our subscribers and Distributors       
Issue:Sep' 2017

MIXED SCENARIO

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.