Question

Why government need to revive jute industry 0 geography?

Answer 1

Answer

Annual economic growth is at a three-year low and many economists believe the slowdown is structural rather than cyclical

Annual economic growth is at a three-year low and many economists believe the slowdown is structural rather than cyclical

Modi 2.0 | Bold steps required for an economic revival

5 min read . 30 May 2019

Asit Ranjan Mishra

The new govt must address the slowdown in economy via a slew of short- and medium-to-long-term measures

India’s economy grew at the slowest pace in five quarters at 6.6% in the three months ended December

Topics

Indian EconomyEconomic RevivalModi 2.0

New Delhi: Martin Wolf, chief economics commentator of the Financial Times, said in an interview in January that Narendra Modi’s second term, if he returned power, is unlikely to be more reformist than the first. “In my experience, governments are less radical in the second term than in the first term. My assumption is another term for this government would not be one of radical reform," he said.

However, expectations on economic reforms have risen significantly after Modi returned to power with a mandate even bigger than in 2014.

The first challenge for the government, of course, will be to arrest the slowdown and revive the economy, through a combination of short and medium-to-long-term measures.

India’s economy grew at the slowest pace in five quarters at 6.6% in the three months ended December, prompting the statistics department to trim its 2018-19 forecast from the 7.2% previously forecast to 7% in February. The first set of macro data the new government will have to deal with is the fourth-quarter GDP data (to be announced on 31 May) that may further decelerate to 6.4% or even lower.

With annual economic growth already at a three-year low, many economists believe the slowdown in economic growth is structural which predates demonetization and goods and services tax (GST), rather than cyclical.

Sunil Kumar Sinha, principal economist at India Ratings, said while cyclical challenges can be addressed through short-term measures, the need of the hour is to address the structural challenges plaguing the Indian economy.

Rathin Roy, director at the National Institute of Public Finance and Policy (NIPFP) and member of Prime Minister’s Economic Advisory Council, is one of the many economists who believe the current economic slowdown is structural, which needs India to change its economic strategy to deal with the situation. In an interview in April, Roy said India needs to change the engine of growth which so far has produced for the top 100 million to producing goods for the masses which is more labour intensive and create more jobs.

However, the government must hit the ground running as it needs to address the slowdown in economic activities evident from most high-frequency indicators. India’s factory output entered negative territory in March after a gap of 21 months, contracting 0.1%. In April, manufacturing and services PMI at 51.6 and 51, expanded at their slowest pace since August and September 2018, respectively. The capital goods segment of IIP, which signals investment demand in the economy, also contracted for the third consecutive month in April.

While weak private investment due to over-leveraged private companies is known to have contributed to the current slowdown, consumption which has been the only engine so far keeping the economy afloat has started waning. Recent macro indicators such as vehicle sales and air passenger growth also point towards a slowdown in consumer spending. Sales of automobiles across segments in India fell 16% in April to touch the lowest in eight years, while domestic air travel in April contracted 4.5% for the first time in nearly five years.

The government in its full budget, which is likely to be presented in July, will be tempted to breach fiscal discipline and go for a demand stimulus. However, there is limited space for manoeuvring as direct tax collections in 2018-19 fell short by ₹82,000 crore with lower corporate tax collections while the anticipated shortfall in indirect taxes, including GST, is estimated to be close to ₹15,000 crore which is likely to have pushed up fiscal deficit well above 3.4% of GDP in revised estimates. At best, the government is expected to frontload capital expenditure by loosening the purse string as government spending has slowed down due to the long electoral process.

Setting the agenda for the next government, the International Monetary Fund (IMF) in April said continued implementation of structural and financial sector reforms with efforts to reduce public debt remain essential to secure the Indian economy’s growth prospects. “In the near term, continued fiscal consolidation is needed to bring down India’s elevated public debt. This should be supported by strengthening GST compliance and further reducing subsidies," IMF said in its World Economic Outlook in which it reduced India’s growth forecast by 20 basis points to 7.3% in 2019-20.