PMO seeks inputs from economists to stem slowdown, raise profitability

Seeks to gauge the implications of slowdown for India’s economic policy.

The Prime Minister’s Office, in a bid to arrest an economic slowdown in the country, is seeking inputs from government economists to reassess both the fiscal and monetary policy issues, an official source told The Hindu .

There has been a slowdown in India’s nominal GDP growth with latest estimates from the Central Statistics Office suggesting that the >growth declined from 13.5 per cent in April-September 2014 to 7.4 per cent in the corresponding period of 2015. Real GDP growth is slowing too. But not as sharply. It rose marginally from 7.2 per cent to 7.5 per cent.

The PMO is seeking to gauge the implications of the slowdown for India’s economic policy and corporate profitability, the source said. The views of the government’s policy think-tank, the National Institute of Transforming India Aayog, have also been sought.

The Union Finance Ministry’s mid-year analysis, which put the slowdown into the spotlight, underscored the need for “carefully reassessing” both fiscal and monetary policy stances and cautioned that understanding the pace and strength of economic recovery is “unusually difficult this year”.

Industrial credit has “slowed dramatically” -- its growth rate has remained under 5 per cent. Growth in capital goods imports, which partially proxies for investment, has decelerated sharply from about 12 per cent in April 2015 to a barely positive territory.

The PMO’s move to gain insight into the state of the economy is expected to lead to corrective changes such as in the monetary policy agreement the government signed with the Reserve Bank of India (RBI) in February 2015, the source said.

The reason due to which the slowdown in the > nominal GDP growth is more pronounced , said the source, is the decline in the GDP deflator, which is a measure for inflation (in addition to the two indices for wholesale and consumer prices).

“What the GDP deflator is telling us is that profitability and liquidity on corporate balance sheets are facing serious squeeze, something that India's top companies are complaining about in their interactions with government,” the source said.

The inflation target set for the RBI in the monetary policy agreement were specified in terms of the consumer prices index, but it is possible, the source hinted, that the government could going forward redefine the target. The government could give weightage in the inflation target to the GDP deflator, he said.

“If it is done, the RBI will be able to reduce interest rates faster and keep inflation within target without sacrificing as much growth,” he said.

While the consumer price inflation is within the target of six per cent, real GDP growth rate so far this year is well below the Finance Ministry’s projection for 2015-16 of 8.1-8.5 per cent. As a result, the government last month revised downwards its projection to 7-7.5 per cent, which is closer to the projection of 7.4 per cent the RBI had released in July 2015.

The GDP growth in nominal terms is lower than what was projected at the time of preparing the budget, making it tougher for the government to achieve some of the targets set in the budget.