Union Finance Minister Nirmala Sitharaman’s assertion that green shoots were now visible in the economy is an indirect acknowledgement of the crisis that the government chose to deny all along. A major folly lies in the perception that the economic downturn is cyclical and not structural. Unless the government comes out of this denial mode and addresses the structural flaws in earnest, the recovery path would be difficult. Sliding growth, declining investments and fall in consumption have pushed the economy into a deep crisis. Despite the recent measures, including cut in corporate tax, capital infusion to boost bank lending, sops for the auto sector and push for infrastructure spending, there has been no positive impact as a sense of uncertainty pervades every sector. Corporate and banking sectors continue to be under stress while there is a lack of appetite for private investments. Though the Reserve Bank of India had announced a string of rate cuts, the benefits are not being passed on to customers by financially stressed and risk-averse banks. Constrained by the fiscal deficit target, the government cannot afford to go for big spending. A dose of realism and a set of fundamental reforms, particularly in land, labour and financial sectors, are needed, rather than quick fixes, to arrest the slowdown and ensure long-term macroeconomic stability. The government needs to come up with appropriate policy interventions to activate the primary growth drivers— consumption, investment, government spending and exports.
The government’s own advance estimates for 2019-20 have pegged GDP growth at just 5%. This means the economy will have grown at the slowest pace since the Lehman crisis in 2008-09. The 5% growth estimate for FY20 is way below the government’s initial estimate at 7% and also beneath the RBI number, which was 7.4%, to begin with. The central bank subsequently lowered growth numbers to reach the 5% mark last month. One will have to watch out now for how close this 5% number is to the actual growth. However, economists now agree that the GDP growth slowdown has nearly “bottomed out”. But, a sustained economic recovery will take time – anything between two to six quarters. The rebound in India’s economic growth is based on optimism over the increase in capital expenditure by the government, higher payouts to support rural income schemes and greater deployment of funds in fixed assets by corporates. While the recent measures unveiled by the government and the RBI to boost growth will help address supply-side issues, it is the private sector which needs to address the demand side of the economy. On its part, the Centre needs to bridge the trust deficit by addressing the concerns of the businesses over policy uncertainties and tax terrorism.