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Arrest Economic Downturn

Spending must increase to accelerate economic growth

ALTHOUGH the stock market has been hitting new highs in the hope of a recovery, there are no signs of the economy improving yet.  India’s GDP fell to 4.5% for the July-September 2019 quarter, down from 5% in the preceding quarter and 7% for the corresponding period of 2018. Economists polled by an agency had forecast a GDP growth of 4.7% for the July-September 2019 quarter, but it actually dropped by 4.5%. The fall in GDP reflects overall contraction of the economy. The fall shows that spending has fallen in various sectors, as a result of which the output has dropped and hence the overall growth. The picture is not rosy for most of the sectors. Union Finance Minister Nirmala Sitharaman might prefer to describe the economic decline as ‘slowdown’ and not as ‘recession’ but the semantics do not much matter here as the stark reality is that the economy has been on the downward spiral for several years. It is not a setback of a year or two. It has been happening as a pattern, and it would be risky to play it down or present it in politically expedient phrases. The fear of the economy slipping further cannot be fought with a politically expedient phraseology. It has to be fought with an economically appropriate strategy.  

The fall in spending and growth in some of the sectors is actually starker than the overall fall. Two major sectors, the non-banking financial companies (NBFCs) and the real estate that reported a declining trend some years ago have not shown any sign of climbing up. A part of the distress in the two sectors was created by the promoters of some of the major companies who indulged in massive corruption through siphoning off of public funds for themselves or venal parties whose sole intention was to draw huge amounts of money and swallow them up. Most of the companies that were found to have been engaged in such gross diversion of public money had built up their reputation over decades. As a result of the collapse or crippling of such NBFCs and real estate companies, other financial institutions such as commercial and co-operative banks and mutual funds that had invested in them also got affected, causing a shrinking of investment and spending. No wonder, the financial and real estate growth slowed to 5.8% in the July-September 2019 quarter compared to 7% during the same period in 2018.

Despite the RBI reducing the repo rate, the investment is not picking up. Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman have been using every forum of businessmen to urge them to make investments without fear, but the investment is not showing growth. The GVA (gross value added) growth in the manufacturing sector contracted by 1% in the July-September 2019 quarter, whereas during the same period in 2018 it had expanded by 6.9%. Modi and Sitharaman gave business entities a big cut in corporate tax rate in September 2019 in order to boost investments, but even that has not worked.

The infrastructure sector is another major sector that is not climbing out of the dip. The Modi government prides itself on unusually high spending on infrastructure–roads, bridges, ports, airports and so on–but the sector has not grown according to their expectations. The infrastructure output contracted for the second consecutive month to 5.8% in October 2019 from a year earlier, which was the lowest figure since 2012. During April-October 2019, infrastructure output grew merely by 0.2% from the year-ago period. Spending on infrastructure spurs growth in several sectors; it improves transportation and provides cheaper access to raw materials and markets for manufacturing companies; it boosts automobile and petroleum industries. With the infrastructure sector contracting, the growth in the other sectors has also not picked up. Adding to overall fall was contraction in the mining sector and fall in the growth of electricity, gas, water supply and other utility services to 3.6% from 8.7% a year ago. Similarly, growth in trade, hotel, transport and communication services fell to 4.8% in the July-September 2019 quarter compared to 6.9% during the same period in 2018.

India eagerly awaits the Union budget 2020-21 to stimulate and lift the various sectors of the economy.

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