The great Indian slowdown
Senior financial journalist
THIS year has been volatile for the country. It was truly the best of times and the worst of times, to slightly rephrase Dickens. On the political front, it was apparently the best of times. There was a peaceful transition to a new government that should have brought about stability on the political and economic fronts. The Narendra Modi-led National Democratic Alliance forged its way to a resounding majority in Parliament.
On the economic front, it became the worst of times. The economic slowdown had begun last year and the growth rate was dipping before the elections. But it was completely unexpected that it would continue to decelerate rapidly as it did in 2019. Former Chief Economic Adviser Arvind Subramanian has now described this as “India’s great slowdown” in an interview, noting that in the past when the growth rate was this low, other indicators were better. Comparing the data for 2000-02 with the current figures, he observed that non-oil imports, exports, capital goods industry and the consumer goods sector all grew at a relatively better pace then, despite similarly low economic growth.
Finance Minister Nirmala Sitharaman was clearly not expecting the great slowdown in July while presenting her first Budget. The precipitous fall in growth subsequently forced her to roll back several decisions while announcing a series of stimulus measures by August. This followed worrying data showing growth in the January-March quarter dipping to 5.8 per cent and even further to 5 per cent in the April-June quarter of 2019 as against 8 per cent last year. This worsened to a six-year low of 4.5 per cent in the July-September quarter, ensuring that the economic decline was continuous for six straight quarters.
To add to the economic woes has been the churning in the financial and telecom sectors. The non-banking financial companies’ sector came under pressure after the collapse of a major player and this affected credit flows. As for telecom companies, the enormous payments now owed to the government following a Supreme Court ruling prompted Vodafone to hint that it may withdraw from the country. The strain on the telecom sector has meant that the halcyon days of cheap telecom tariffs could soon be over.
The government has also had to face industry leaders voicing fears publicly over tax terrorism and harassment. These concerns have been haunting this government right from its first tenure. It was in the early days of Modi 1.0 that an extremely complex income tax form was launched and then withdrawn owing to severe public criticism. Then later a provision was introduced to make the industry criminally liable for violation of corporate social responsibility norms. Hence, a businessperson could go to prison simply for not being philanthropic enough. A public outcry prompted a reversal of the decision. Trade and industry are then justified in fearing to criticise the government, as veteran corporate chieftain Rahul Bajaj did recently. He voiced genuine apprehensions over the government’s aversion to criticism. His views were promptly decried as unjustified as he had no qualms at making these comments at a public forum.
In other words, there has been largely bad news on the economic front over the past year. But the equally bad news has been that the government’s policies have largely been reactive. In its first tenure, the Modi government went ahead with significant reforms in the real estate sector and on the bankruptcy code, apart from working on GST. This time around, it has been slow in pushing structural reforms.
Instead, it sought to tackle the slowdown by providing a stimulus to the real estate and banking sectors, apart from cheering up the industry by cutting corporate tax rates. It has been helped by the central bank which reduced interest rates five times over the past year. But the government has yet to take any substantive measures to stimulate consumption.
In this backdrop, it seems clear that a bolder vision needs to be taken to deepen economic reforms. It also has to be recognised that the current round of protests and demonstrations over the Citizenship Amendment Act and the NRC will have an impact on the economic scenario. The fact that people all over the country have felt the need to come on to the roads to make their voice heard does not improve the climate for investment. In fact, both domestic and foreign investors would hesitate to make any fresh capital inflows into projects at a time like this. There is a narrative that the government has introduced issues like these to divert attention away from the economic slowdown. If at all it is a diversionary tactic, it is certainly a failure as the infirmities of the economy are only being highlighted by the political protests on the streets. The unsettled conditions in many states that are looking forward to fresh investments and increased employment opportunities are bound to worsen the situation.
The government thus has to not only act on the economic front but also in the political arena to ensure that the flames of this agitation are doused as soon as possible. If, as the Prime Minister has said recently, there is no prospect of a nationwide NRC in the near future, then this needs to be articulated by the entire government in one voice. Currently, there are many voices from the current administration saying different things Unless this issue is resolved, it is evident the year past may have seen the best of times for the ruling party, but it must now brace for the worst of times.
