Indian Economy in 2016: Problems & Prospects

TOPIC: General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

India’s current economic position

India’s GDP growth rate of 7.6% in 2015-16 is powered by rebounding in farm output and improvement in electricity generation in fourth quarter of fiscal. The growth numbers came back on strong 7.9% growth in the last quarter of 2015-16. But, the following quarter, the GDP advanced 7.1% and missed market expectations of 7.6% growth. It was the lowest reading since the quarter of 2014. In second quarter of present fiscal 2016-17, the growth was 7.3%, better than previous quarter but missing market expectations of 7.5%. Recently, the data on first two quarters have been released by CSO which predicted the GDP to grow at 7.1% in 2016-17.

Performance in the beginning

Q1 of 2016-17 saw robust growth of 7.9% which surpassed expectations.
Though private investments weren’t upto mark and public investments also did not keep up its growth, the pickup in electricity and private consumption contributed to the first quarter growth.
However, things started declining after it. The global slowdown contributed to declining growth rate as the oil prices were on the rise again with OPEC cutting its production. There was also influence of right wing ideology all over the world which started with BREXIT, then election of Trump as US President and now new President Candidate of France- Marine Le Pen. This made economies more inward looking rather than support global economy which had some effect on Indian economy.
Currently, switching from a cash economy to a digital economy will also take its toll. These factors have tightened the economy a bit which may not help in increasing in GDP in immediate future.

The rise and fall

From 7.9% in Q1, Indian economy fell to 7.1% in Q2. Thereafter also, India’s growth remained constant with being above 7% mark only. Thus, India has indeed been a bright spot in lustreless global economy.
Agriculture did very well in Q1 of 2016-17 with record 5.5-5.6% growth. This contributed significantly to positive growth.
It was the domestic demand which had kept up a whole lot of constituents of GDP- whether industrial or services. But there was slowdown in all of it.
Between April and September, the IIP (index of industrial production and manufacturing) has shrunk and has seen lowest growth rate of -0.1% compared to 17.8% of 2006-07. This shows the major issue of lack of aggregate demand. The demand not being there, no investments are taking place and there is now surplus capacity.
This is the first time in recent time, the GDP growth is above 7% but the fixed capital formation is consistently declining. The gross fixed capital formation has fallen from 32% to 29%. This is bound to have effect on GDP.
Thus, economy is running on only one engine of consumption demand. This doesn’t sustain the economy and hence there has to be reliance on investment demand too.
The services sector which is as dependent upon industrial growth as it is on overseas exports- particularly IT services, there have been difficulties in increasing the exports. The new US president has said that H1B visas would not get preference over American workers is another area where IT is concerned. The services PMI (Purchasing Manager’s Index) is below 50 (at 46) which means India is on a negative territory. It is not good for economy as India’s services sector makes up over 60% of GDP. Nonetheless, it saw a decent growth because of pay out by the seventh pay commission.
There is a major hiccup of credit growth, which has been just 8.5%. In this, the retail loans have taken up and not the industrial loans. Further breaking up, the MSMEs are not growing at all and SMEs sector is in negative territory. So there is lack of confidence that is prevailing amongst businessmen in country.

How to increase demand

Irrespective to what MPC recommended to RBI for its last policy review, there has to be measures to address consumption + investment + government expenditure.
The demand for investment goods will build up if the RBI redresses the rate of interest issue (repo and reverse repo rate). If the interest is lower, there can be incentive for undertaking investments.
When it comes to demand for automobile, FMCG products and non-consumer durable, the way forward is to have a good rabi crop and continued expenditure on social security schemes like MGNREGA, health mission, rural missions etc. The demand of MGNREGA will increase as industrial and formal sector has slowed down. This will induce consumer demand of the products.
There will be some increase in GDP as tax collections and subsidy reductions will be good wrt to previous years. Therefore, there will be increased divergence in GVA and GDP because GDP is calculated after including the tax collections and excluding subsidies.
The government role in next 4-5 months is most crucial to lift the sentiment and the economy. The government’s investment capacity is very limited as it has rolled out Rs. 70,000 crore extra money of which 55000 crore already invested. Hence, only very little part of it remains to spend in rest of the year. Even the private investment capacity is anaemic right now because of huge NPAs with banks.
The government now, irrespective of its fiscal position, has to increase the expenditure on roads, ports, electricity, railways as they can drive the economy much faster. Thus, if the investment issue wants to be tackled, the government has to focus away from demonetisation and GST.
The real estate sector must be assisted by government. The forward and backward linkages of real estate are huge. The land has to be made available with new technology being assisted with it. Digitisation of land records, being transparent. This will revive real estate sector. One way would be to make housing loans much cheaper.

Conclusion

No doubt, the demonetisation will bring down economic growth as India has been primarily a cash economy and transfer to digital economy is going to take time especially when financial intrusion does not exist in hinterland. Government should go for remonetisation as fast as possible. Without money, the demand is getting killed and demand disruption costs economic growth very dearly. This time the government should come out with pro investment budget. The data is expected to be revised once the budget is laid out 1^st February and next monetary policy on 7^th February. So if RBI is sufficiently enthused by pro investment budget and the government led investment demand picks up, then there might be chances of considering the interest rates revision which will propel credit demand.

Connecting the dots:

Demonetisation will have a deep impact on Indian economy. Comment.