Forget ordinary Indians. Even the finance ministry and RBI don’t see eye to eye. So, while RBI, in its third bi-monthly monetary policy released in August, projected 2017-18 GDP growth at 7.3% (same as estimated earlier), GoI’s Economic Survey (Volume 2) that followed just nine days later was much less sanguine. “The balance of probabilities has changed, with outcomes closer to the upper end (6.75-7.5%) having much less weight than previously.” Shorn of gobbledygook, the Survey expects growth to be closer to 6.75%, rather than 7.5%. Sadly, the latest GDP data gives credence to the Survey’s numbers rather than RBI’s. Not only is GDP growth at 5.7% the lowest in the last 13 quarters, but more alarmingly, manufacturing — where we hope to provide jobs to the close-to-one million youth who enter the workforce every day — has grown at just 1.2%, the lowest in the last three years. The only time we saw manufacturing growth slip so badly earlier was in the third quarter (October-December period) of 2014 when it fell to 1.7%.
In such a scenario, the biggest dilemma for GoI is whether it should see the slowdown as temporary and opt to sit it out, while the effects of both demonetisation and GST wear out. Or should it see the slowdown as more structural in nature and respond with concrete action.
Act at Leisure, Repent Too
The good thing is that even as there is no agreement on whether the slowdown is temporary or structural, there is surprising consensus on what insurance industry calls the ‘proximate’ cause: the relentless decline in gross fixed capital formation (GFCF), or investment, especially private corporate investment. From a high of 38% of GDP in 2007-08, the share of GFCF in GDP is now down to just 29.8%.
So, is lack of demand, including export demand, that is driven partly by rupee appreciation, resulting in excess capacity and, in turn, crippling investment? Are the twin deficits —overleveraged corporates and distressed banks, burdened with non-performing assets — responsible? There are no definite answers. What is definite, however, is that we cannot afford to wait for growth to pick up. Not when we are still home to a third of the world’s poor.
So, what can we do? Monetary policy is too broad-brush and acts with a long lag. That leaves us with fiscal and exchange rate policy. The latter, again, can help only at the margin, especially in an increasingly protectionist world. Hence, it boils down to fiscal policy.
Sure, higher government spending might increase the fiscal deficit. But not necessarily. Not if the robust GST numbers for July 2017 are anything to go by and if GoI pursues more aggressive asset sales. Remember, government spending can also crowd-in private investment.
It might also go against received wisdom on fiscal deficits. But what did the US do in the aftermath of the financial crisis? It gave textbook economics a wide miss and adopted unconventional policies, both fiscal and monetary. The US budget deficit shot up to over 10% in 2009, and we all know what happened to interest rates.
The ball is in the government’s court. It needs to ‘just do it’.