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India’s idling growth engine: Measures announced by govt to jump-start economy have not borne any fruit

Anuj Agarwal

The world of automobiles is ditching the internal combustion engine and is obsessing over electric powertrains. However, the analogy of an internal combustion engine and the Indian economy still remains very relevant. With growth faltering, it begs the question, which of the cylinders are firing that can keep the growth engine running?

The growth for the first quarter of fiscal 2020 came in at 5%. Private consumption-the most important cylinder of growth-took the biggest hit, and the high frequency data doesn't really give the confidence of consumption reviving soon. The NBFC crisis, which also dented private consumption, with financing companies less willing to lend, isn't likely to get resolved any time soon. A slew of corporate crisis further eats into the economic output and weakens the consumer confidence in terms of creating uncertainty about future economic prospects. The case in point being instances like the failure of PMC Bank and Jet Airways, and the critical condition in which India's leading telecom operators currently are. This puts jobs and incomes at risk. RBI's September 2019 survey shows that consumer confidence is at a six-year low, as sentiments around employment, income and discretionary spending declined.

Hopes are set on consumer demand to revive with RBI's easy money policy. But transmission of policy rate cuts at the retail level can do only so much to revive demand in an environment where sentiments remain weak. Even if the cost of money goes down, the consumer is unlikely to borrow and increase consumption, if future prospects of income and employment are not too comforting. A big push to rural demand is not really in sight. Income boost to farmers under PM-KISAN remains minimal. Moreover, much of the money allocated under the scheme remains unspent. Many states are yet to prepare and submit their database of farmers to make them eligible for the benefits. MSPs have witnessed a moderate increase this year. For many of the crops, mandi prices have remained even below the MSP. The recent untimely rains have further adversely affected farm output and incomes.

The investment cylinder looks weak as ever, and the expectations of capex revival just keep getting postponed with every forecast. Capacity utilisation levels remain low and below the optimal utilisation rates. In such a scenario, any new private investment is unlikely. Lower interest rates might only serve to encourage corporates to restructure their debts to reduce their debt servicing costs. Surveys have pointed to the fact that savings from reduction in corporate taxes aren't as huge as government estimates these to be, and there is no guarantee that these savings will translate into investment spending or increased payouts for employees. No business has an incentive to invest unless there is a visibility of increased demand and capacity utilisation. The CMIE Capex data, read as new and revived investments net of dropped, has remained mostly in the negative territory since the second quarter of fiscal 2018, barring a couple of marginally positive readings. Much of the onus of reviving investment, then, lies with the government, which remains constrained by fiscal considerations despite RBI's surplus reserve transfer, due to weak tax collections.

India has been long betting on exports to be its growth driver. The Make in India campaign is in the same spirit, without much success. In the current global scenario with rising protectionist sentiments and weak economic growth, even this cylinder fails to propel growth. Challenges on the external front have an adverse impact not just on India's exports, but also business sentiments and investments. While the IMF expects global economic growth to rise to 3.4% in 2020 from 3% in 2019, countries contributing to this acceleration remain fragile with greater downside risks.

The ongoing US-China trade war is having a detrimental impact on global economic growth and trade flows. Theoretically, the US-China trade war opens export opportunities for India via trade diversion. A recent UNCTAD study puts the trade diversion effects of the US-China trade war for the first half of 2019 at about $21 billion. India was able to capture only 3.6% of this. Competitiveness of Indian exports has always been questioned on account of inherent nature of our businesses and structure of supply chains, and government policies. India's decision to move away from the RCEP further isolates Indian businesses from the opportunity to be a part of the global value chain.

Growth revival remains crucially hinged on demand to pick up, which, in turn, is linked to sentiments. In a situation of weak sentiments, even a policy intervention like helicopter money can fail, where people might actually be inclined to hoard cash rather than spend it. Too much negative news flow further weakens the spirits. Emotional well-being and confidence is what drives discretionary spending-sentiments play the key role.

What will keep the growth revving at above 6% levels is difficult to say. A slew of measures announced by the government over the course of recent months to jump-start the economy have not borne any fruit so far, and will likely come into play only in the next fiscal. With recent economic data releases, analysts are pessimistic about the second quarter growth. SBI expects it to be 4.2%, and Nomura too is around the same levels. Both the banks are now expecting growth for the fiscal 2020 to be closer to 5%. One would wish for the economy to be similar to an electric vehicle, where you can get all the torque at once and pick up pace.

Since it is not the case, it is time for the government to work its gears, send out the right signals, and get its growth cylinders firing.

The author is an economist. Views are personal