How the economy fared under Modi in 2019
The year 2019 was epiphanic for Indian policymakers who have been steering the economy in the Narendra Modi era. The economy was on a slow decline for most part of this decade, with growth deceleration intensifying over the last fiscal and spilling into the first two quarters of 2019-20. Yet, the policymakers were in denial mode, ignoring the ominous signs of the slowdown, until the writing appeared on the wall.
The 'welfare' state
It did not help matters that this was also the year of general elections, when the political narrative had to take precedence, even if that meant withholding information on the state of the economy that was vital for undertaking policy course corrections. This undermined the urgency and the focus that was required on the economy.
It appears that the political calculations of the government that came to power in 2014 have consistently undermined the policy response needed to address the economic reality of the moment. The post-2014 emergence of new welfare-ism is a manifestation of this priority.
The various welfare interventions, despite significant gaps in implementation, were instrumental in vote consolidation for the ruling party in a caste-ridden rural Hindi heartland.
The cost for these political gains were met through increased government spending, which put pressure for improving revenue mobilisation, including by deploying what has been described as 'tax terrorism'.
This, in turn, undermined business sentiments and the revival in private investment. Importantly, even when some steps were taken to reform economic regulation and management, such as the enactment of the Insolvency and Bankruptcy Code 2016, operational weaknesses and credibility concerns on the measures announced may have come in the way of realising the intended outcomes.
Flagging demand
It is against this background that the year 2019 saw a further deterioration in the economy's growth momentum, with a distinct possibility that the current fiscal year may now record the slowest annual GDP growth of around 5 per cent in nearly two decades.
It also showed the current government's continued proclivity to announce big, aspirational ideas without undertaking adequate groundwork. For instance, the launch of the ambitious Ayushman Bharat Yojana in 2018 has been followed up by the objective of making India a $5 trillion economy over the next five years, ie, by 2024-25.
On the face of it, it is meaningful to have aspirational targets for public action. They help in outlining a vision, mobilising public opinion and collective effort and provide a basis for creating a strategic framework for public action. In the Indian context, this is critical to attain the stated targets more effectively and efficiently.
Finally, the question that developments in 2019 pose is how serious the current economic slowdown is and what does the next year or two hold for India.
Of the four drivers on the demand side, three — private consumption, investment and net exports (exports-imports) — are underperforming, with government expenditure being the prime support to the economy at the moment.
An indefinite reliance on government spending to keep the economy afloat is fraught with dangers of serious macroeconomic derailment. If that happens, it would become even more difficult for the other two domestic demand drivers to recover. There is little that one can do to stoke the external demand by way of policy measures in the short run. At the same time, private consumption and investment are both driven by stakeholder sentiments and economic fundamentals.
While the government has to bring down the real cost of investment, it has to address the factors that could lift the overall business sentiments at the same time. This includes removing political uncertainty arising from a number of issues that is interfering with purely economic decisions of individuals and communities, address concerns related to tax terrorism and other regulatory compliances and encourage Foreign Direct Investment (FDI) inflows that have been stagnating for a number of years now.
A quick recovery in investments would not only boost demand, including through consumption, when investment happens in greenfield projects and supports expansion in employment, but would also boost supply and domestic savings rate to the improve the potential growth of the economy.
Constricted supply
On the supply side, the two major concerns are related to the health of the financial system and deterioration in the agriculture terms of trade over the last few years.
The latter has a bearing on income stabilisation in the farm sector and, therefore, on the sustainability of factor productivity and output growth in the sector, with direct consequences for aggregate demand in the economy. Nearly 75 per cent of the banking sector in India is in the public domain, which suffers from frequent governance failures. As a result, the public sector continues to exercise an undue control on the more productive private enterprise. This must change if the economy has to sustain high growth for an extended period.
Although a limited counter-cyclical policy could address some of the factors behind the slowdown, much of the current predicament is rooted in structural factors and requires some time for the correctives, when taken, to impact the outcome.
India's recovery to its trend growth rate of 7-7.5 per cent is going to be slow and may take a couple of years depending upon how soon the political environment in the country improves to strengthen its economic fundamentals.
(Courtesy of Mail Today)
Also read: How to fix the Indian economy which is in a free fall
Also read: How to fix the Indian economy which is in a free fall