There seems to be a curious apathy in the government about the state of the economy. All economic indicators point to the fact that the condition of the economy is, indeed, serious.
GDP growth in the first quarter of financial year 2019-20, at 5 per cent, is at the lowest in six years, with manufacturing sector growth collapsing to 0.6 per cent. This has been largely fuelled by a lack of demand in the economy, seen in consumption growth plummeting to 3.1 per cent in Q1, from 10.6 per cent in the previous quarter.
The RBI may oblige with another round of policy rate cut given the present conditions.
The auto sector, a barometer for economic progress, is in the doldrums. Auto sales in August were down 23 per cent, with passenger car sales dropping by a whopping 41 per cent. Already 3.5 lakh jobs have been lost in this sector and more job cuts may be in the offing.
Finance Minister Nirmala Sitharaman’s recent remarks in Chennai over the millennials’ preference for ride-sharing (Uber, Ola) over vehicle ownership came in for much criticism and mirth, especially on social media. There might well be a change in attitude over vehicle ownership among a narrow section of millennials, but that there is a vast aspirational class craving for all the ‘symbols’ of a market economy seems to have escaped the Finance Minister’s notice.
That the government expects private investments to lift the economy from its present morass was evident from the Finance Minister’s second ‘booster dose’, announced on August 30. This new package was all about mega mergers between public sector banks. These mergers are expected to bring greater operational efficiency and improved balance sheets, which will enable greater lending to industry and other sectors. Though these merger moves may have some merit they are unlikely to help turn around the economy.
Even if the mergers take place smoothly — which is a big assumption, given the huge human resource issues that are sure to crop up — and greater funds are available for lending, will the private sector take the bait, given the weak demand conditions? This seems to be the $5-trillion question at the moment.
As argued in my previous column, the government seems to be focusing on the ‘supply side’ to pull the economy out of its slump when it’s the ‘demand side’ that is crying out for attention. There is an urgent need to put more money into people’s pockets to boost spending and overall demand. To put it in classical Keynesian terms, the problem currently is one of aggregate demand and not aggregate supply.
So, are we heading into a typical Keynesian ‘liquidity trap’ where, despite repeated interest rate cuts, businesses refuse to borrow, because of the weak demand conditions? In such conditions frequent rate cuts and a banking sector flush with credfit are hardly going to help the situation.
Former Prime Minister Manmohan Singh, in a recent newspaper interview, squarely blamed demonetisation and the botched-up implementation of GST for the present mess. No doubt hoping that the Modi government would take a cue from it, he even referred to how his government dealt with the 2008 global financial crisis.
China, which is grappling with its own growth and trade war worries, recently went in for a major stimulus package. This included easier bank lending norms and pumping money into public infrastructure projects.
The Modi-II government, in the four months since it returned to power, has been silent on the rural sector. Though the share of agriculture in GDP has been declining over the years, a large number of people still depend on the farm sector for their livelihood. Besides, rural demand is crucial for the economy — ask any FMCG company chief. So it is imperative for the government to look at the issues affecting the rural sector closely, improve agricultural growth and boost rural incomes.
There seems to be a perception in the government that the PM-Kisan scheme, an income transfer scheme announced a few months before the elections, is enough to solve the problems of that sector. The issues confronting the economy are both cyclical and structural and there are no real quick fixes; so the government needs to move fast to tackle the larger issues.
The BJP’s huge election victory in May 2019 was propelled to a large extent by a huge number of first-time voters who pinned their hopes on Modi’s leadership skills. It’s time for the government to address the problems and aspirations of that section of society to which it owes its victory.