The Narendra Modi government may finally be coming to terms with the worrying state of India’s economy.
The world’s fastest-growing large economy till recently, India’s GDP growth has taken a hit over the past few quarters. From cruising at nearly 9% in financial year 2016, it fell to a three-year low of 5.7% during the April-June quarter of FY2018. Jobs have seen a steady decline even as industrial production slipped. Private spending, both of consumers and companies, has also slowed down.
While the government and its key representatives had been defensive about the emerging scenario till now, there now seems to be a change.
On Sept. 20, India’s finance minister, Arun Jaitley, indicated that the economy will be given a booster shot, a grudging acknowledgement of what many have been pointing out for a while now: there is a slide.
“We have noted all the economic indicators,” Jaitley said on Sept. 20. He said, “The government will take additional measures in the coming days after consulting PM (prime minister Narendra Modi).”
With national elections due in less than two years, it is no surprise that the government has swung into action now. In 2014, Modi promised to turn around the then ailing Indian economy. However, many of the reforms undertaken by his government are yet to show results.
In November 2016, India declared two high-value notes—Rs500 and Rs 1,000, which constituted 86% of the total money in circulation by value—illegal tenders. This led to a severe cash crunch, particularly for small and medium-sized enterprises. While it was presented as an initiative to fix the menace of unaccounted wealth in the country, India’s central bank later said that 99% of the banned notes had returned, considerably diluting the very purpose of the drastic move.
Then, even before the economy could recover from the demonetisation shock, the government introduced the goods and service tax (GST), independent India’s biggest tax reform, which replaced a bevy of taxes with a far more uniform system. However, that too seems to have caused severe problems.
“What we need right now is more government spending,” Rajrishi Singhal, an independent consultant, said. “Private spending has dried up as banks have been battling stressed loans and companies are over-leveraged. Private spending, too, has been hit by demonetisation. In all this, the only way out is for the government to start spending more. The question now is, how are they going to do it.”
Singhal reckons that numerous public sector units are sitting on piles of cash, and the government must ensure that they spend and kick-start economic growth. “Many of the economists in the current government believe that the fiscal deficit is sacrosanct, and that the government shouldn’t widen it. Then there is the constant worry of rating agencies downgrading. But, if you don’t spend now, it can be counter-productive.”