With the economic woes showing no signs of abating and almost all the key sectors taking a hit, India can no longer take comfort in the assumption that the slowdown is a cyclical phenomenon and that the economy will bounce back. All the signals point towards a crisis that is structural, not cyclical. Experts have warned that the country may have already entered a ‘quasi-recession’ phase. Five straight quarters of slowing growth reflects the longest slump since 2012 while the GDP growth plummeted to 5% in the April-June quarter, the slowest pace in six years. Consumption and export growth have been slowing while investment remains subdued. Despite the fire-fighting measures, unveiled by Finance Minister Nirmala Sitharaman recently, there are no signs of investments or consumption picking up. The domestic stock market has tanked because the real concerns about the economy are yet to be addressed. Weak domestic consumption, especially in rural areas, is resulting from low employment levels and non-availability of finance — the twin issues that need urgent attention to salvage the situation. A raft of measures announced by the government, including infusion of liquidity into banks, withdrawal of additional levy on foreign portfolio investors, tax hike on the super-rich and surcharge on capital gains tax, may offer some immediate relief but cannot serve as a panacea for the economic ills. It is time for providing consumption stimulus through tax cuts as part of the reforms in direct taxation.
Though the merger of public sector banks is expected to enhance their capacity for lending, the harsh reality is that the banking sector in India hardly supports the small and medium enterprises. Less than 2% of the credit needs of small businesses are met by bank finance. At a time when employment is a massive challenge and the NBFCs or shadow banking system is imploding, banks must step in to meet the credit needs of millions of potential entrepreneurs. While a stimulus package covering tax cuts, subsidies and other incentives may help in energising the private sector and boost investments, it should be backed by structural reforms in labour, land, financial and tax administration sectors. Though the Reserve Bank of India lowered its benchmark interest rates four times in a row, the transmission remains inadequate. While the monetary policy can impact cyclical factors, it has its limitations when the slowdown is structural. As a result, investment-focused fiscal policy and active continuation of structural reforms become imperative at this juncture. An indicator of the worsening situation was the announcement by the country’s largest carmaker Maruti Suzuki India Wednesday that it would suspend production at its Gurugram and Manesar plants for two days. The auto major had reduced production by 33.99% in August, making it the seventh straight month of reduction.
The economy needs a much larger push as it is reeling under losses, layoffs and an investment freeze.