Editorial

Unending slowdown: Indian economy

India’s economy continues to decelerate with the government’s estimate for first-quarter gross domestic product pegging growth at a 13-quarter low of 5.7% in April-June. The reasons for the protracted slowdown — a slide of five straight quarters from 9.1% in March 2016 — are many and varied. But there is little doubt that the demonetisation exercise combined with the uncertainty around the July 1 adoption of the new indirect tax regime served to significantly dampen economic activity. While the GST-related “inventory deaccumulation” that Chief Statistician T.C.A. Anant referred to may well be reversed in the current quarter as companies across sectors gain comfort with the new tax regime, it is still doubtful whether demand for industrial output is going to attain any meaningful strength. The Reserve Bank of India last month said that its industrial outlook survey had “revealed a waning of optimism in Q2 about demand conditions across parameters and especially on capacity utilisation, profit margins and employment.” A look at the sector-specific trends shows that manufacturing expansion in gross value added (GVA) terms has slackened to a near stall at 1.2%. This, from 5.3% in Q4 of the last fiscal and 10.7% a year earlier, is a far from heartening sign. With capacity utilisation expected to weaken this quarter, according to the RBI, and with surveys suggesting that consumer sentiment has deteriorated steadily in August, the auguries for a demand rebound are far from promising.

 

While expressing concern about the slower-than-expected expansion, the Finance Minister has acknowledged that the challenge before the government now is to work out both policy and investment measures to boost momentum. One option would be to suspend the fiscal road map for a limited period in order to pump prime the economy through increased capital spending by the government. The risks of fiscal loosening are of course manifold, especially at a juncture when several State governments have either announced or are contemplating large-scale farm loan waivers, which would push up interest rates and crowd out fresh lending. Still, there is a thin sliver of a silver lining in the GDP data. The services sector continues to remain buoyant. Quarterly GVA across this broad swathe that encompasses trade, hotels, transport, communication and broadcasting accelerated to 11.1%, from 6.5% in the fourth quarter, faster than the 8.9% posted in the corresponding period last year. The civil aviation sector saw passenger traffic soaring by 15.6%, and construction activity, a provider of jobs, also ticked up by 2%. The Finance Minister has his task cut out: to find ways to restore momentum before the tailwinds of low inflation and affordable energy prices start reversing direction.

This article is closed for comments.
Please Email the Editor

Printable version | Jan 19, 2021 2:03:54 AM | https://www.thehindu.com/opinion/editorial/unending-slowdown/article19604584.ece

Next Story