As Narendra Modi takes guard for a second innings in office, a galore of economic challenges are staring in the face of the government and they brook no delay. India’s economic growth is expected to slow down to less than 7% in 2018-19 from 7.2% in 2017-18 and 8.2% in 2016-17. Tackling the growth slowdown, given the constraints on spending due to the tight fiscal position, will be a major challenge for the Modi government. With private consumption slowing down, the government needs to loosen its purse strings to spend more to increase the income levels of the people and to revive economic growth. The Index of Industrial Production (IIP) and Purchasing Managers’ Index (PMI) indicate a broad-based demand slowdown in the economy. The immediate task before the new government is to stimulate demand in the economy and uplift investment sentiments. Another rate cut in the monetary policy review is desirable and it should be accompanied by a fiscal stimulus. There is also a strong case for expanding the direct income scheme for farmers to put more money in the hands of rural consumers and thus boost rural discretionary spends. After a stupendous mandate, Modi now carries the burden of heightened expectations. The people expect his government to step up spending in a major way – build more roads, invest more in infrastructure sectors, cut taxes, reduce interest rates, boost exports and catalyse domestic demand. The staggering rise in bad loans, sagging exports, mounting losses of central public sector undertakings are the challenges that need to be overcome quickly to unlock the country’s growth potential.
India may be the fastest growing major economy in the world, but it is facing serious headwinds reflected by slowing growth, waning demand, low private investment and the uncertainty of global economy. The exports have remained sluggish with the share of exports in the GDP declining from 25.4% in FY14 to 19.7% in FY19. Anecdotal evidence suggests massive job losses, particularly in informal sector, after demonetisation and GST rollout. According to the World Bank, eight million new jobs are needed every year in India. Agriculture sector continues to reel under crisis. Agriculture as a percentage of GDP, which stood at around 21% in 2004-05, has since dropped to around 13%. There is a need for proactive policy intervention to revive investments and a set of structural reforms in labour and finance sectors. Though there are some signs of investment picking up in some sectors, the government needs to resolve the bad loan cases at a faster pace and the banks have to increase lending to spur investments. As noted economist C Rangarajan put it, accelerating economic growth must be on top of the agenda of the new government.