The economy needs urgent attention from the new government
The popular mandate of the elections is not reflected in the economics statisticsUpdated: Jun 02, 2019 19:16 IST
Narendra Modi has just started his second innings after an overwhelming mandate from the people of India. This is clearly, at least politically, an endorsement of the performance of the first Modi government. However, economic statistics tell a different story. Gross Value Added (GVA) growth in India has fallen continuously between 2016-17 till 2018-19. GVA growth in the quarter ending March 2019 was 5.8% — the lowest since the June 2014 quarter, when Mr Modi assumed office. The agricultural component of GVA in March 2019 actually registered a decline. In another development, the government has finally released the first Periodic Labour Force Survey (PLFS) report, which shows unemployment to be 6.1%, a four decade high, in the country. To be sure, the numbers aren’t exactly comparable to the ones in previous Employment Unemployment Surveys conducted by the National Sample Survey Office. However, it is hard to argue that the current employment scenario is not worrisome. The short point is, this government has inherited a slowing economy and rising unemployment. Because the legacy is its own, it cannot even shift the blame.
So, what should the government do? It needs to decide on both short-term and long-term measures. Some sectors of the economy might be in need of immediate support. Although the India Meteorological Department has predicted a normal monsoon, the government should work out a detailed plan to support farmers in case the rains fail them. Similarly, public works, many of which may have got stuck thanks to the enforcement of the Model Code of Conduct during elections, should be expedited immediately. Such measures, necessary as they are, cannot be of use in the long-term. India’s growth story in the recent period has been a consumption-driven one. This can only take us up to a point. India needs investment demand to take our growth rate to double digit levels. While capital formation growth has increased in the last couple of years, it is still not close to what it used to be in the pre-crisis phase (16.5%, 13.9% and 16.3% in 2005-06, 2006-07 and 2007-08).
This government credits itself for improving India’s rankings in indicators such as Ease of Doing Business. It has also had some relief on the monetary policy front with the Reserve Bank of India lowering interest rates in the last two monetary policy reviews. All of these developments are expected to boost investment activity, which, in turn, has a multiplier effect on incomes. If these channels are not working, the government should probably explore other options, including that of public investment leading the charge in staging a recovery from the economic slowdown.