How to End the Economic Slowdown?

This pain of adjustment is slowing down the economy. On completion of this adjustment, the economy will be larger, cleaner, more formal and poised for fast growth. In the interim, as the economy adjusts to these changes, the panellists at the India Economic Forum made suggestions for relief measures for ensuring that the cost paid for the adjustment in terms of slower growth would be minimum and medium term measures to ensure reversal of the slowdown.

The consensus among the panellists was that the GDP growth in the next financial year, i.e., 2020-21, will be between 6 and 7 per cent.

V Anantha Nageswaran, Part-time Member, Economic Advisory Council to Prime Minister Narendra Modi, said that in this projection of 6 to 7 per cent, the risk was in fact on the lower side. He also said that with growth in this and the next financial years likely to remain below 7 per cent. In order for the economy to grow to the size of $5 trillion by 2024-25, in line with the target given by Prime Minister Modi, the GDP growth rate will have to be over 15 per cent in each of the three years following next financial year, i.e., 2020-21.

Nageswaran said that the bulk of the heavy lifting for returning the economy’s growth rate to the average of the last 10-15 years will have to come from the monetary side. Fiscal room, he said, was relatively limited. But further reduction of policy rates by the Reserve Bank of India (RBI) can bring immediate relief. The onus for fostering a recovery in the short term, he said, was on the RBI. “The RBI has done a lot last year, but I think there is still more that can be done,” he said. He recommended the creation of a liquidity window for non-banking financial companies (NBFCs) much like had been done in the past. If the RBI was to set up such a window, it will send out a signal to the market about which NBFCs are solvent, liquid and can lend.

This is important because bank lending slowed to a 23-month low in the month of September. “Right now, there is reluctance to lend and to borrow. Both need to be addressed separately. Reluctance to borrow comes from the underlying economic sentiment, but reluctance to lend is something, which is more in the control of the authorities and they can do something about it,” he said. Gopal Krishna Agarwal, National Spokesperson – Economic Affairs, Bhartiya Janata Party (BJP), made a strong case for expansionary fiscal and monetary policies. This was essential, he said, to address the problem of slow demand in the economy. He said that the feedback he has received from various surveys instituted by the party’s associate research groups shows that the private sector is holding back on investments because of the lack of consumption demand in the economy. “Since the government has improved the delivery mechanisms, including through use of technology, government should increase its expenditure to ease the demand problem in the economy,” he said.The best avenues for increased government expenditure, Agarwal said, was an investment push in the infrastructure sector so that the logistics cost of private companies can come down. This will go a long way, he said, in improving the private sector’s competitiveness in the global economy.

He also said that although the Insolvency and Bankruptcy Code (IBC) introduced by the Narendra Modi government is a good step for addressing the stress in the corporate sector and the banking sector due to bad loans, the focus of insolvency professionals is too much on liquidation and they pay insufficient attention to resolution. He recommended relying more on the option of takeover of boards of companies under the IBC, the way it was done for Satyam. This will improve chances of resolution of the companies, he said.

Former Chief Economic Advisor and Chairman EGROW Foundation, Arvind Virmani, recommended a thorough reform of the Goods and Services Tax (GST) to smoothen out the technological glitches in the collection and refunds system. The single step of reforming the GST, he said, will go a long way in reducing the pain of adjustments. He also recommended taking up the simplification of the direct taxes in the upcoming budget. Since the cuts in tax rates will result in revenue reduction in the short term, he recommended that the reductions should be carried out in a phased manner over the next three to four years. For boosting the farm sector, Virmani recommended decontrol of the agriculture sector. He also stressed the importance of land and labour reforms. He also advocated a focused push for quickly clearing and disbursing all dues of private companies pending with government departments.

Shubhda Rao, Chief Economist, Yes Bank, said that the recovery will not be a quick process and will take two to four more quarters. She said that the investment sentiment will improve with policy predictability and the corporate tax cuts rolled out by Finance Minister Nirmala Sitharaman will help business confidence because they improve the potential for returns on investments made.

Explaining the imperfect transmission of repo rate cuts to lending rates of banks, she said, banks are unable to lower deposit rates much because of the savings slowdown in the economy as a result of which lending rates have not dropped as much as the RBI’s policy rates have. Still, she was hopeful, that there is room for further 25-40 basis points reduction by the RBI in its policy rates before it reaches the end of the ongoing easing monetary cycle.

D K Joshi, Chief Economist, CRISIL, agreed with Rao that a quick economic recovery cannot be expected, and it will take a couple of quarters. He recommended that the government raise non-tax revenue through asset monetisation and strategic disinvestment and use that to put money in the hands of the people for demand creation. He proposed the use of channels such as MGNREGA, PM-KISAN and construction-centric government expenditure schemes for this purpose.

Subhomoy Bhattacharjee, Consultant, Research & Information System for Developing Countries (RIS) stressed on the importance of addressing the problems faced by the small, medium and micro enterprises (MSMEs) in the current slowdown. “The spurt in GDP growth a few years ago had come when exports had grown rapidly. Exports is where the manufacturing sector will expand,” he said. Expanding manufacturing is essential to make sure that the excess labour from the agriculture sector can be absorbed into productive jobs.