By Dr D M Deshpande
The GDP growth rate has hit a new low of 5.7 per cent in April-June quarter, down from 7.9 per cent in the same quarter last year. This is the fourth consecutive quarter in which the growth rate has declined and it is now clearly a cause for worry. We have lost the tag of the fastest growing economy; we had overtaken Chinese growth rate but have now slid well below their 6.5 per cent rate of growth! With no signs of recovery in sight, the chances of the economy ending up with a growth rate of barely 7 per cent have increased significantly. The worst hit is the manufacturing sector where the gross value added is just 1.2 per cent. While this picture captures the formal sector, the worst affected is the informal sector, figures for which will come in January only.
So far the narrative of slow down has centered around two highly visible factors-demonetisation (DeMo) and introduction of GST. DeMo has affected growth in October-December and Janaury-March quarters. The impact of the same was unanticipated and stretched much longer than expected earlier. There is little doubt about the fact that the economy would recover from this one-time shock. Interestingly, the economy grew at a slower pace even in three quarters before DeMo. The effect of destocking before the rolling out of GST on July 1st is likely to be restricted to just one quarter only. While both have contributed significantly to the sad state of affairs, there are other factors at work which have also dented the performance of the economy.
Economists point out to the problem of ‘twin balance sheet’; several steel and infrastructure companies are unable to pay back their loans to banks which in turn have stressed the balance sheets of several banks, especially those in the public sector. As a result of DeMo effect, banks are flush with funds but the credit off take is poor. With stressed balance sheets due to large non-performing assets, banks are reluctant to take risks, on the one hand. On the other, slow down has meant heightened risks for fresh investments. Indications are that the demand crisis has led to huge curtailment of investment. This in turn, is further slowing down the growth rate. It is also borne out by the fact that the pace of job generation, too, has taken a hit. It is rather unfortunate that in the year of good monsoon and benign commodity prices, the growth rate should have taken such a bad hit.
In a sluggish economy, domestic demand is bound to be poor. The government alone cannot do much to revive demand and investment. It is constrained by fiscal responsibility Act; hence it cannot, on its own, increase investment beyond a certain threshold limit. There is a talk that government may push some of the better performing PSUs to undertake large projects and step up investments. This may actually prove to be counterproductive. Government and PSUs generally are not efficient users of funds; now if they are asked to invest in haste, their project plans would go haywire. Even as the world economy is showing signs of recovery, sadly, the Indian economy is decelerating. Demand is picking up in global markets, but our exports have stagnated, worse, they have declined in the last couple of years. Exports peaked to $318 billion 2013-14. Thereafter, it is a fall every year with marginal improvement in 2016-17 to $274 billion, but well short of the peak performance recorded earlier. Merchandise exports fell 1.2 per cent in 2014-15, another 15 plus per cent fall in the next year. Fall in the export of software and IT has not helped the matters either.
In the boom period between 2003 and 2011, economy grew by 8 per cent annually on an average. These were also years in which the exports rose by 20 per cent. No economy in the world has registered sustained high GDP growth rate with falling exports! Export performance not only depends on real exchange value but also on a whole lot of other issues. Cost of credit is high in India notwithstanding that the inflation of late has been benign; land cost is high, especially post new land acquisition laws that have come into existence; tax rates have been high though there is some rationalisation now in post GST era; freight rates, high again because of our mass mover of goods railways, subsidised passenger transport; low productivity of both labour and capital and the list goes on.