It was a story few predicted. From a pedestrian 4.7 per cent growth in FY14, none expected the Indian economy to find itself in a sweet spot with an unbeatable 7 per cent growth the following fiscal. But as history suggests, confidence is a fragile thing and good things rarely last.
A combination of factors—largely domestic and partly the subdued global economy—took away the punchbowl just as the party had started, pushing the economy downhill in the past six quarters. Yet it’s puzzling that the Centre took a gamble with its and the country’s fortunes rolling out unprecedented currency and tax reforms. The situation was already explosive; all it needed was a spark to light the fuse, which demonetisation and GST did for the economy.
Taking stock of the situation, Finance Minister Arun Jaitley on Wednesday assured “special measures” (read stimulus). In reality, what we need are painful policy changes to reverse the imbalances. All key growth engines—exports, private investments, government investments and consumer spending—are muted. Exports, which contribute about 20 per cent to the GDP, are in the slow lane, not because of lacklustre global trade, but due to domestic reasons including rupee fluctuation.
Likewise, the drought-like situation in private investments, despite ample liquidity and low interest rates is due to the twin-balance sheet problem. The debt time bomb is primed and ready to go off anytime, so the government should be battle-ready to chip in with fresh capital and/or bold decisions (selling the likes of IDBI at a cut-price deal). Past measures to bring black money back via the much-hyped income amnesty schemes ended up being ‘talk-tough and act-slow,’ with no meaningful revenue generation.
The 7th Pay Commission did put extra money in the public purse, but that’s yet to translate into higher spends. Low rates could be a last-gasp opportunity to use cheap borrowing for infrastructure projects, but clearly, public spending, aided by higher revenue—tax collections, income from privatisation, etc. —alone can put the wind back in India’s sails.