A Long-Term Panacea To Resetting The Economy On The Turnaround Path

by / Monday, 02 December 2019 / Published in News & Updates

Cyclical problems can be addressed by periodical policy interventions like reducing repo rates by the RBI meant to boost consumption and investment by infusing more liquidity in the economy.

The challenges only seem to surmount for Modi 2.0 as the Indian economy faces an unprecedented slowdown in recent years. Slackening consumer demand has led to a drag on the financials of core sectors, prominently led by auto and FMCG. With investor optimism getting rattled in the Indian macroeconomic fundamentals, Ratings agency Moody’s has lowered India’s GDP growth forecast to 6.2 percent for the current year. The growth projections for the current fiscal has also been down revised from its estimate of 7 per cent in June to 6.9 percent by the RBI. Experts have also widely opined that India will steadfastly have to maintain a growth rate of 8 per cent to become a USD 5 trillion economy over the next 5 years.

Shedding its policy of fiscal conservatism and heeding to the growing demand of industry and trade bodies to announce a fiscal stimulus, the government announced the roll-out of a fiscal stimulus in order to shore investor sentiment and kick-start the consumption cycle in the economy. The first phase of measures broadly contained a rollback of enhanced super-rich tax on overseas and domestic equity investors, exempting startups from angel tax and bolstering the liquidity positions of PSBs through recapitalization package of Rs 70,000 crore. A key priority focus area of the stimulus measures was announcing a package to alleviate the woes of the beleaguered auto sector which is facing its worst crisis in two decades as declining consumer demand has led to cutbacks in production. Going ahead, the government is likely to announce a further set of stimulus measures to assuage concerns of stakeholders across the trade and industry spectrum.

However, is there scope to question whether the stimulus roll-out is a mere populist rhetoric or its motivations are led by an underlying fiscal prudence holding the potential to propel the economy on a growth trajectory by addressing macroeconomic concerns? It also needs to be examined in the context of whether the slowdown is structural or cyclical in nature?

With the Bimal Jalan Committee recommending the transfer of a surplus of Rs 1.76 trillion to the Government of India, it is widely expected that the process of strengthening liquidity in the system and measures to revive the economy will be expedited. How far this extra-budgetary initiative succeeds in mitigating growing fiscal concerns remains to be seen. Rising expenditure and shortfalls in revenue continues to be a key concern area for the government. Banks continue to reel under the burden of non-performing assets (NPA) and continue to grapple with an ever-increasing liquidity crunch. The government will need to make sector specific interventions to revive the capex cycle in the private sector which has largely remained dormant. Expediting the disinvestment process to unlock funds and speed up public sector spending should also remain the top priority focus of the government.

Though there remains a broader consensus among experts that the economic outlook remains sluggish, it remains to be seen whether the slowdown is cyclical or structural in nature. Every economy undergoes cyclical periods of downturns and peaks depending on the performance of business cycles. Cyclical problems can be addressed by periodical policy interventions like reducing repo rates by the RBI meant to boost consumption and investment by infusing more liquidity in the economy. If there is no uptick in demand revival and spending in the economy, the problems may be deep-rooted and may need to be addressed through the formulation of structural policies. Mere roll-out of a fiscal stimulus may turn out to be a short-term response to a long-term problem and may not have the desired mitigating effect.

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Source: http://www.businessworld.in/article/A-Long-Term-Panacea-To-Resetting-The-Economy-On-The-Turnaround-Path/24-11-2019-179254/