Dire Straits: The Indian economy is in a major slowdown. Can Nirmala Sitharaman fix it?
With economic growth at its lowest and unemployment at its highest in several quarters, alongside a likely delayed monsoon, the FM's task is only uphill.
India’s economic growth fell to 5.8% in the January-March period of 2018-19 — the lowest in 20 quarters — due to a sharp slowdown in investment and manufacturing growth as well as a contraction in agricultural production.
This pulled down gross domestic product (GDP) expansion to 6.8% in FY19 — the slowest in the first stint of the Narendra Modi government.
The economy’s revival will thus be a key challenge for the new finance minister, Nirmala Sitharaman.
Economic growth in FY19 was much below the government’s own projections of 7.2% in the first advance estimates and 7% in the second one. Economists expect the Reserve Bank of India’s (RBI) Monetary Policy Committee to cut the policy rate in the upcoming meeting on June 6 to revive investments.
Growth in the March quarter left India behind China as the fastest-growing large economy after a year and a half, as China grew by 6.4% in the quarter. However, on an annual basis, India continued to remain the fastest-growing large economy. Finance secretary Subhash Chandra Garg attributed the slowdown in GDP to the crisis in non-banking financial companies (NBFCs). “The slowdown in the fourth-quarter GDP was due to temporary factors like stress in the NBFC sector, which affected consumption finance. The first quarter of the current fiscal year (2019-20) would also witness relatively slow growth, but from the second quarter onwards, it will pick up,” Garg said.
However, financial services and related sectors grew by 9.5% in the fourth quarter of FY19 — that's the highest pace in at least eight quarters.
On the other hand, growth in gross fixed capital formation (GFCF), which denotes investments, declined to 3.4%, the lowest in several quarters.
With private investment already low, the government’s curtailment of capital spending in the fourth quarter to meet the fiscal deficit target could be blamed for the sharp fall in the GFCF growth, which was over 10% in the three previous quarters. The government’s revenues saw a shortfall of over ₹1.6 trillion, according to the data released by the Controller General of Accounts on Friday, May 31.
With the fiscal deficit targeted at 3.4% of GDP for 2019-20 in the interim Budget, it would be critical to see if Sitharaman will go by this number — or change it to boost the economy.
The State Bank of India (SBI) group chief economic adviser Soumya Kanti Ghosh argued, “We believe that the government should target a structural deficit as an alternative to targeting the fiscal deficit, like most advanced economies and several emerging economies...” But the parameters of current economic growth are worrisome. Private final consumption expenditure growth fell to 7.2% in the fourth quarter, from 8% in the third, and 9.7% in the second. The growth was at a low of 7.3% in the first quarter.
Manufacturing activity suffered a slowdown, with growth falling to 3.1% in Q4 compared to 6.4% in the third quarter, 6.9% in the second quarter, and 12.1% in Q1.
Madan Sabnavis, chief economist at CARE Ratings, said, “Low growth in manufacturing calls for direct intervention by the government. The economic activities are likely to pick up as the government is likely to undertake measures to boost growth.”
But there are further measures in the offing.
Economists like B Prasanna, group head, global markets sales, trading and research, ICICI, has said, “We expect consumption impulses to remain muted... and recovery in the same will depend on the monsoons and the efficacy of the income schemes for the rural population.”
The poor and the business classes both need encouragement from the government through the right economic policies. There is also the possibility of a delayed monsoon, which could harm the agricultural sector.
The rising unemployment rate was at a 45-year-high in 2017-18.
The National Sample Survey Office (NSSO) unemployment rate among youth rose sharply in 2017-18. It stood at 27.2% for urban females in 2017-18 compared to 13.1% in 2011-12, 13.6% for rural females (from 4.8% in 2011-12) and 17.4% for rural males (from 5%).
The stats clearly show that the Indian economy is lagging. And there has been a weak economic current for several years.
Sitharaman needs to take some really tough measures. And fast.