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Indian Economy and Government Apathy

India should now focus on solving these issues to bring back the economy on the higher trajectory of economic growth.

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Indian GDP numbers continued its downward spiral for consecutive seven quarter falling to 4.5 per cent in the second quarter (July-September) of the year 2019-20.In the second quarter of the previous year, the GDP growth was 7.1 per cent. The GDP growth seen in the last quarter was slowest in more than six years. It is very important to understand and analyse the reasons of this downward spiral. India's economic growth has taken a hit due to a number of factors - including a slowdown in private consumption, investment and export - but the key factor is lack of credit (money to produce goods) growth and demand in the market.At present electricity generation, growth is 1.8%, which is one of the lowest compared to previous lower growth of 2.5% and 3% in India. Growth of exports fell from 9% in 2017-18 to -1% in 2019-20. Overall tax-revenue and consumption is also falling. Direct tax (personal tax + corporate tax) revenue decreased from 16% in 2017-18 to 0% in 2019-20.

There are several short-term and long-term factors responsible for current low growth of Indian economy. The long-term factors are exports, investments and investment-related twin balance sheet challenges. Key short-run factors are twin balance sheet problem; public sector bank lending led to increase in NPA’s, growth of crony capitalism, too much debt in the infrastructure sector and overall higher debt. Regulators also have not given any warning about the situation to the financial institutions. There is a break down of the overall financial system. This is referred to as a twin—balance sheet problem. There is a mismatch in banks’ lending to corporates, banks loans to infra sector could not be repaid.

Moreover, there is also four balance sheet crisis of NBFC’s and Real Estate Companies. The NBFC’s pay major money to real estate companies. All NBFC’s are in doll drum. The trigger for this is ILF&S default; the ninety thousand crore ILF&S company and most importantly regulator never warned ILF&S.  Financing the built-up of homes which led to unsustainable lending. Banks and NBFC has stopped lending and this led to a lending crisis. This is affecting macro economy tremendously, as credit is instrumental to run the economy.

Very recently, NPA’s are coming down and NBFC’s are operational though slow growth is going to affect these sectors. Companies paying more interest than their earnings, interest rate is 10.5% and likely earrings are 6.1%. Thus, the annual shortfall is 4.45%. This adds to the stress to the corporates. Thus, “things are going to get worst before getting better for the macro economy”.

These stresses are also due to imports of oil. Recently oil prices came down by $110 to $65; this gave boost to revenue and consumption. Agricultural prices came down which led to lowering of income of the agriculturists but agricultural output is not declined. Thus, we need a strong policy to recover the current downward.

India should now focus on solving these issues to bring back the economy on the higher trajectory of economic growth. Some of the important solutions as agreed by several economists is that we need to stop hidden expenditure. Budgeted expenditure does not reflect the true picture. Off the balance sheet deficit is 8.5% to 9% of GDP. We need not to raise government spending. Do not cut the personal income tax. If tax is reduced to benefit consumers, this will only affect very lesser percentage of people i.e. effect is limited to the richer segments of the population. Rather it should be done in a much more effective way, by way of targeting and in an equitable manner by providing Universal Basic Income (UBI) so that consumption can be raised and not raising GST rates. We also need to fix the data problem especially GDP and Budget statistics as important decision-making depends on data. Some of the important questions we need to answer for finding the solutions.  These are - Budget deficit question, Bad loans - is it fixed, Compensation to states based on GDP growth, Independent assessment of bad loans to fix the financial system, Direct cash transfers to farmers.

These above five questions are policy questions, which are not easy to answer. The solutions suggested are–Need to segregate structural and short-run component of the economic problems, Address the twin balance sheet problem and four balance sheet problem, Keep moderate expectation about economic growth, Co-operative federalism in policy, And not to be complacent for good news in the economy. In addition, some of the important steps needs to be taken such as stop subsidy to power sector and fertilizer as these have a negative impact on the macro economy. We should raise agricultural productivity (e.g., China and Brazil have started using Genetically Modified crops to increase productivity). Solutions for the agricultural sector are – one market for agricultural products – ENAM, Incentives for irrigation, agricultural policy stop flip-flop, need Minimum Support Price etc.

The ray of hope is that our Finance Minister has already announced 102 lakh crores of infrastructure sector investment to boost economic growth, as there is a positive relationship between infrastructure development program and economic growth. She has also taken several economic reform measures to address the problem of lower economic growth and many more reform measures are in the pipeline that may be announced in the forthcoming Union Budget to be presented by the end of February 2020.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Dr. Karunakar Jha

The author is Professor, Department of General Management, School of Business, UPES

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Dr. Hiranmoy Roy

The author is Associate Professor, Department of Economics and International Business, School of Business, University of Petroleum and Energy Studies (UPES), Dehradun

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