Rate cuts haven’t work
Annual growth in eight core sectors, which account for 40% of India’s industrial output, dipped to 0.2% in June. This is the lowest monthly growth in this index since April 2015. Earlier last month, the International Monetary Fund brought down its growth forecast for the Indian economy in the current fiscal year by 30 basis points to 7%. One basis point is one hundredth of a percentage point.
India’s Gross Domestic Product growth has been declining continuously starting with the quarter ending June 2018, with the most recent data available for the quarter ending March 2019. If the current trends, such as a decline in core sector industrial growth and falling sales of cars and two-wheelers are any indication, the slowdown might have continued for the first quarter (April-June) of the current fiscal year as well.
The Indian economy badly needs a policy stimulus to come out of its present deceleration. To be sure, the monetary policy arm of the government has been trying to provide this stimulus. The Reserve Bank of India has already cut policy rates thrice in 2019. It is likely that the next monetary policy meeting, which begins on 7 August, will announce another round of rate cuts. However, these rate cuts do not seem to have worked.
Lower interest rates can only help in reviving economic activity when economic sentiment is robust. They will be ineffective if investors do not see future demand that justifies their investment. Such a situation can only be salvaged through policies that focus on reviving demand rather than lowering borrowing costs.
There are two other factors which might have made the current economic policy slowdown even worse.
The first is something natural to capitalism, and is often referred to as creative destruction. Established firms in two important sectors – telecom and automobile – are witnessing disruptions due to the emergence of a much bigger competitor (Reliance Jio) and push towards future technology (electric vehicles). Such disruptions necessarily involve some amount of pain. The fact that this has coincided with a general economic slowdown has only made matters worse.
A series of policy decisions such as increasing the income tax rate on the super-rich and imposing strict regulations on spending Corporate Social Responsibility funds etc are generating fears that the government is being too harsh towards businessmen and top executives in order to meet its revenue targets. Such measures would have worked in a closed economy. However, in a globalised world, they can spook businesses, even trigger a capital flight.
It is important that policy interventions do not make matters worse.