NEW DELHI: India’s economy now stares at a precipitous whirlpool, which many economists fear will continue to get sucked into, unless drastic steps are taken to resuscitate demand by a massive spending thrust.
"There is a pressing need to forget about fiscal deficit targets for the time being and pump prime the economy," said M Govinda Rao, former member, Prime Minister’s Economic Advisory Council. India’s fiscal deficit target of 3.3 per cent of GDP is already on course to be missed according to the government’s own admissions on the back of poor indirect tax collections and a huge give-away on corporation taxes.
Most analysts agree with former prime minister Manmohan Singh’s comments that mere tinkering with economic policy will not help revive India’s ailing economy and a stronger medicine is needed. Singh made his comments on Friday after India recorded a six-year low GDP growth of 4.5 per cent during the July-September 2019 quarter.
"Till now we have mostly seen supply side measures like slashing taxes and dolling money to certain sectors. These are not helping in the short or medium run as the real cause for our ills is a huge shortfall in consumer demand which is reflected by the low wholesale inflation that we are recording … huge spending to create a demand cycle by spending on both physical and social infrastructure is the need of the hour," said Biswajit Dhar, JNU’s Centre for Economic Studies and Planning, a department of which the finance minister is an alumnus.
In October, wholesale inflation dipped to a three-and-a-half year low of 0.16 per cent, compared to 5.54 per cent in the same month last year, on the back of unusually low prices of manufactures, despite October being traditionally a festival month with high sales. Economists also feel the Reserve Bank is also more likely to cut rates now to revive investment.
Friday’s GDP "data mean that another rate cut at the RBI’s Monetary Policy Committee meeting next Thursday is a done deal," said Mark Williams, Chief Asia Economist, Capital Economics. The RBI’s overnight lending rate or Repo rate already stands at a low of 5.15 per cent. However, despite the low interest rate regime investment growth slumped to just 1.0 per cent year-on-year during the second quarter of 2019-2020.
“The low growth data will certainly encourage the RBI to slash interest rates further but with low demand for loans and a fear among bankers that more loans may turn sticky, credit or investment growth is unlikely to revive … the way out is to tackle the demand side by increasing spending on NREGA, education, health, rural telecom and rural roads,” said Arun Kumar, Malcolm Adiseshiah Chair at Institute of Social Sciences.“In reality the GDP figures would have been worse but for the Government sector spending,” said Rao.
'Expert advice does not seem to reach policy makers’ ears'
"We are still not out of the woods. Strong demand creation measures are absolutely necessary," said Rao, adding "Unfortunately expert advice does not seem to reach the policy makers’ ears." Nobel Prize winning economist Abhijit Banerjee had in October too said policy makers should “worry more about demand” and advised that India needs to pump in money into the economy, "especially in the hands of the poor."
Government spending surged in the second quarter of this fiscal as expenditure public administration, defence and other services emerged as the one of the faster growing with a 11.6 per cent growth. Data from some 24 state governments also revealed that states had tried their hand at pump priming with revenue expenditure growth going up sharply by 16.2 per cent during this period. However, consumption demand and consumer sentiments remained low.
As per a RBI survey, consumer sentiment hits a 6-year low in September with sentiments around employment, income and discretionary spending going down. Economists suggest that an extraordinary spending push of the kind that India went in for in the aftermath of the 2008 Wall street crisis which saw global growth hit a nadir was needed to reverse this trend.