03 Jul 2019 17:02 IST

Economy is awaiting Modi’s magic

The biggest task will be to kickstart the economy amid the slowing GDP and a falling rupee

The biggest task for the new government will be to kickstart the economy that is up against the odds of slowing GDP and a falling rupee. The government will have to take corrective measures to ensure stability. The combination of monetary policy and strategic reforms will be the key.

Declining economic growth

The major concern for the government will be to address the declining economic growth as GDP has hit an all-time low of 6.6 per cent in the last five quarters, and may even reduce to 6.4 per cent in the first quarter of FY 2019-20. This will have an adverse effect on the money supply. The recent cut in 25 basis points by the RBI, bringing down the repo rate to 5.75 per cent, may attract investment, revive money supply and push the economy a bit but, in the long run, a few more basis points cuts and the strategic mix of monetary and fiscal policy will be beneficial.

With one million people added to the workforce every month, the unemployment rate is at a 45-year high — at 6.1 per cent. According to statistics, 7.8 per cent of the employable youth in India are jobless and many are yet to acquire the skill-sets to be employed. The new government will try to increase hiring in the public sector and boost the Make in India programme to reduce this deficit.

The macro analysis for household consumption shows a decline in demand for products due to insufficient income growth. This has led to industries facing a tough time, especially the automobile sector, which saw sales dip by 20.5 per cent in May 2019. To deal with such a situation, the government is expected to incentivise industries by adding tax benefits and special infrastructure schemes in the upcoming Budget.

MSMEs, realty sector

Micro, small and medium enterprises (MSMEs) were dealt a huge blow by demonetisation, GST and due to the global trade war. The industry’s output is 0.1 per cent — worst in 21 months. MSME’s should be in the top list for the new government as a large sector of the population works in this sector and the slow growth reduces the employment opportunities. The government should strengthen small-scale industries by providing increased access to funds.

Another target area will be to work on the liquidity crunch in the non-banking sector, as a result of which the real estate sector has also been hit hard. Funding to the realty sector has fallen by 80 per cent and outstanding credit for housing finance companies rose to 58 per cent.

Next on the priority list should be to mitigate agricultural distress with the extension of PM Kisan Yojana and increasing the farmers’ income by enabling food processing and export facilities in key farming regions. This includes promoting activities such as animal husbandry, poultry and fishing. A reduction in the GST slab on milk products to increase the output for dairy is expected.

The next five years will be very busy for the government as it needs to cope with the challenges from the national and international economic turmoil. Equity inflows into India have declined to $44.4 billion, hence the government is eyeing measures to increase foreign direct investments (FDI) by showcasing the country as an ideal place for companies shifting their geographies due to the ongoing US-China trade war.

(The writer is a student at Great Lakes Institute of Management, Chennai.)