Modi 2.0’s toughest challenge: economy

Among a variety of challenges that the new government at the Centre faces, the economic challenge is possibly going to hold centre stage. The fall in GDP growth from 8.1% in March 2018 to 5.8% in March 2019 indicates that the economy is genuinely not in good shape and the government has a tough job on hand. Precisely because GDP is connected to productivity and productivity is overwhelmingly connected to participation of human labour and engagement.

With the slowdown in the economy, unemployment is going to turn up its ugly head once again, though this was already one of the key pressing issues during the 2019 election campaign. The NSSO report, finally released after the elections, adequately corroborates this idea by stating that the unemployment rate is currently above 6%.

Data suggests that half the youth in India are aged 25 or below, of which 19 million are expected to be jobless by the end of 2019, according to a 2018 report by the International Labour Organisation (ILO). The challenges are, therefore, humongous, and the government needs to engage itself in serious introspection. It must set up a competent task force to address the issues at ground level.

Already reeling under a consumption slowdown, liquidity crisis in the NBFC sector, the fall in exports and lower terms of trade in the agriculture sector, the optimism around India’s economic growth has taken a beating. With GST not living up to its expectations, fiscal expenditure rising amid compelling priorities, pushing up economic growth looks difficult.

Weaker consumer demand and slower growth in investments are blamed for the slowdown in India’s economy. Consumption constituted about 60% of GDP during 2017-18 and 2018-19. A decline in consumption indicates that demand has dried up and needs to be revived immediately. It is in this context that raising the income of the bottom pile of population assumes significance. This could be achieved through direct income transfers and a host of other income support mechanisms that need to be worked out through wider deliberations and consultations.

Secondly, investment — another major driver of economic growth — also witnessed a bumpy ride. Private investment grew 7.2% in the March quarter, down from 8.4% in the previous quarter, while overall investment growth slowed to 3.6% from 10.6%. The slowdown will put pressure on the government for a fiscal stimulus, including tax cuts on fuel products to boost consumption.

The farm sector contracted 0.1% in the March quarter, compared with 2.7% growth in the previous quarter; manufacturing grew 3.1%, slower than the 6.7% of the previous quarter. Several indicators such as automobile sales, rail freight, petroleum products consumption, domestic air traffic and imports are indicating a slowdown in domestic consumption.

Corporate earnings hit a six-quarter low growth rate of 10.7% during January-March 2019 on weakening consumer sentiment and softening commodity prices. Stress in the non-banking financial companies (NBFC) sector have largely affected consumption finance.

Weak rural activities have also been impeding growth recovery. Low rural wages, and slowdown in credit to small and medium industries and weak demand in two-wheeler and commercial vehicle sales have also contributed to low economic activity and thus low economic growth.

Unlike in the first five years of the Modi government, the solution to the problems is complex and requires a radical shift in economic policy. If the first term of the government was dominated by housing, roads, toilets, Skill India and Digital India, the second term will have to be dominated by investment, jobs and resurrection of the dislocated financial sector. Among immediate priorities, one would expect the government to focus on measures to revive consumption, address financial sector dislocation by recapitalising PSU banks, boost the manufacturing sector to ensure job creation and address the issue of skill shortage in the country to ensure employability.

Likewise, on the rural front, where farm distress has been acute and threatening further farmers’ productivity, the government should sincerely attempt to revive the terms of trade in agriculture.

The government must strengthen e-NAM, enhance micro-irrigation facilities, increase credit to agriculture and boost farm prices through effective implementation of some relevant schemes. Not just welfare schemes, but the government now has to adopt a balancing act between development and consolidation.

The government needs to ensure that it maintains a balance between fiscal prudence and investment-driven growth;
an imbalance could either lead to a slowdown or rise in inflation. It is possible for the government to go for an option such as to increase investments to provide a temporary boost, but it has to proceed with extreme caution as direct tax collections — a key source of investment — has not been satisfactory during the year.

Now, all eyes are on the new Union Finance Minister Nirmala Sitharaman, who has to implement quick measures to balance growth and consolidation — a key blend to achieving double-digit growth in the future.

(The writer is Professor, LBSIM, and former senior faculty, IIFT, Delhi)