India’s GDP growth plummeted to 5% in the first quarter of the current fiscal year. This is the lowest in 25 quarters. This is only the second instance of growth rate falling for five consecutive quarters since 1999. Private consumption, which has been the main pillar of economic growth in recent times, grew at just 3% in the June quarter. Anecdotal evidence of falling sales of everything from cars to biscuits had warned us about this crash. This is not all. Nominal GDP growth was just 8% in the first quarter of FY20. The budget has made its tax projections assuming a 12% nominal growth. A four percentage point shortfall in this figure for the entire year, if it happens, will mean a big shortfall in tax collections. This also means that the government will find it very difficult to spend what it has committed in the budget.
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What is to be done if we want to get out of this situation? This question has been debated significantly in the past few months. There has been a debate on whether structural or cyclical factors are behind the slowdown. There have also been arguments on whether monetary policy or fiscal policy is the best tool to handle the situation. The policy making establishment has favoured the ‘use monetary policy route to fight cyclical slowdown’ line. It has clearly not helped.
If the slowdown is not cyclical, then the first question the government and its economic advisers need to answer is how did the economy get here in the first place? Has low food inflation driven low inflation regime put a squeeze on farm incomes and hence demand? Have policies like demonetisation and Goods & Services Tax given a severe blow to demand from the informal economy? Did the Indian policy-making establishment fail to prepare for a low export growth phase after the 2008 crisis? Do declining household savings pertain to a growing viability crisis in their finances? All these questions need serious and sincere engagement. Unfortunately, cautionary voices even within the policy making circles have not been heeded so far. The Narendra Modi government needs to recalibrate its economic policy approach. First principles of the discipline, rather than misplaced notions of infallibility for past decisions, need to be the driving force from now onwards.
{{/usCountry}}If the slowdown is not cyclical, then the first question the government and its economic advisers need to answer is how did the economy get here in the first place? Has low food inflation driven low inflation regime put a squeeze on farm incomes and hence demand? Have policies like demonetisation and Goods & Services Tax given a severe blow to demand from the informal economy? Did the Indian policy-making establishment fail to prepare for a low export growth phase after the 2008 crisis? Do declining household savings pertain to a growing viability crisis in their finances? All these questions need serious and sincere engagement. Unfortunately, cautionary voices even within the policy making circles have not been heeded so far. The Narendra Modi government needs to recalibrate its economic policy approach. First principles of the discipline, rather than misplaced notions of infallibility for past decisions, need to be the driving force from now onwards.
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