FPJ Edit: Economy under serious stress

The latest GDP numbers should not surprise anyone. When in the first quarter of 2019-20, growth fell to 5 per cent observers had warned of a further slowdown. The maiden budget of Nirmala Sitharaman was a growth-dampened. After the damage was done, she tried to reverse the slide but by then other factors had already come into play. Besides, the impact of a record reduction in corporate tax rates would be felt only after a considerable time lag. The 4.5 per cent GDP is the lowest in more than six years. Not everything that went wrong can be blamed on a global slowdown and/or cyclical factors. These may have contributed somewhat but the crisis was largely of our own making. Sector after sector of the economy is saddled with growth brakes. Manufacturing has contracted to a record level. Farm sector is stagnating. Construction has shrunk from 9.3 in the 3rd quarter of last financial year to 3.3 per cent in the latest quarter. Services sector, the bread and butter of the economy, too has reported disappointing numbers, contracting from a growth of 8.2 per cent in the last quarter of last financial to 6.7 in the second quarter of this year. In short, there are no bright spots in the economy. Former Prime Minister Manmohan Singh called the latest growth numbers ‘unacceptable’, though he needs to recall a still lower growth in a couple of quarters during his second term in office. Of course, the economy should not be subjected to political ‘tu-tu, main-main’, but our politicians cannot help being... well, politicians. Finance Minister Sitharaman while speaking in Parliament last week said the economy was not in recession. Continuous drop in GDP for several quarters does typically qualify to be termed a recession. Regardless, it is now her and the Prime Minister’s responsibility to check the slide. Government spending alone may not be sufficient to spur growth. Besides, in the first seven months of the current financial, the budgeted deficit target was crossed. Even if the RBI were to cut further the prime lending rate it would fail to spur fresh investment in the absence other conducive factors. Expanding fiscal deficit is not a good option, especially when the malady lies elsewhere. Fresh investment by private sector has failed to pick up despite lower tax rates. Corporate balance sheets continue to be stressed despite debt structuring of the last five-plus years. The non-banking financial sector is in the grip of scandal and slowdown, too. As a result, the realty sector is stagnating, with the financial assistance from a government fund failing to pull it out of excess housing stock and a very poor off-take.

Thanks to wrong policies, the power utilities are back in the red. Energy sector as a whole is doing badly, especially after the sharp fall in the price of solar power. If inflation continues to be low, it is because of a lack of adequate demand in the economy and unfair terms of realisation by farm producers. Agriculture sector cannot become equitable for farmers without wholesale rejection of the old policy regime and a brand new approach which relies on cash rather than in kind subsidy to farmers. Too many entrenched interests stand to lose from a total revamp of farm policy. Again, rupee is too strong for exports to gain momentum. Fear of a spurt in the price of imported energy has made exports uncompetitive. Ideally, the government should involve domain experts to advise on ways to arrest the decline. Nothing can be gained by adopting an ostrich-like approach and deny that the economy is stressed. Unless urgent steps are taken, the 5-trillion dream by 2024-25 will remain only a dream. Need for the PM to be a bold economic reformer cannot be exaggerated. Otherwise, more GDP shocks will become unavoidable.