Arrest this slide

In an admission that something is very wrong with the economy, the Centre has reconstituted the Economic Advisory Council to the Prime Minister under the leadership of NITI Aayog member Bibek Debroy. This comes in the wake of growing unease within the Bharatiya Janata Party on how a “hard landing appears inevitable” (to quote a former NDA finance minister) even as a slew of Assembly elections and finally the 2019 general election draw near. The alarm bells began to ring after the Q1 GDP numbers — at 5.7 per cent, GDP growth was at its lowest in three years — were out. The Centre seems to have realised that no time can be lost to policy drift — the economy needs to be fixed, and fast. In doing so, it should grapple with the complexity of the crisis rather than resort to knee-jerk responses.

A combination of forces is holding up growth. The slide began well before demonetisation. It can be ascribed to the evaporation of rural demand after two poor monsoon years and a debt-strapped industry being unable to undertake investment. These problems persist. In this scenario, demonetisation, despite creating a climate of tax compliance, ruptured the transactional rhythm of the economy, particularly in the unorganised sector. Teething issues in GST, chiefly delays in realisation of input credit, have further disrupted cash flows, hurting exporters. Hamhanded implementation of GST, along with rising fuel prices, could push retail inflation (at 3.36 per cent in August) ever closer to the 4 per cent target of the Reserve Bank of India. Apprehensions that kharif output has been hit by irregular rain implies that rural demand may not provide the stimulus that industry needs. As if to confirm the apprehensions, both the rupee and the sensex have fallen off recent highs. With the Fed signalling the unwinding of its $4.5 trillion balance sheet, leading to expectations of a rising dollar, India’s capital flows could reduce, as they have already begun to do, exerting further pressure on the currency and the current account deficit.

With tax revenues trailing below Budget expectations, there’s little room for a fiscal stimulus. Therefore, the Centre is right in tapping into overseas soft credit to fund big infrastructure projects. Structural reforms such as GST will lead to long-term gains, but the present pain can cause serious socio-economic imbalances. The EAC should focus on quality expenditure, which can crowd in private investment, while the Monetary Policy Committee should vote for growth over inflation containment.

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