India may be staring at the prospect of a recession, given the worsening economic slowdown and the gloomy outlook for virtually every sector. Unless a fresh set of reforms is undertaken immediately, the haemorrhage will continue. 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 and financial sectors. Though the Reserve Bank of India lowered its benchmark interest rates for the fourth time in a row, the transmission remains inadequate while several sectors are reeling under the impact of the downturn. Though the industry captains have sought a stimulus package of over Rs 1 lakh crore to kick-start the investment cycle, there are doubts over whether the financial package alone can help revive the economy. Given the current and evolving growth scenario, it can no longer be a business-as-usual approach. The economy needs a much larger push as it is reeling under losses, layoffs and an investment freeze. It grew at 6.8% in 2018-19 — the lowest in five years. Industrial output in 11 of the 23 manufacturing segments contracted in April-June 2019. Since February, the RBI has cut the repo rate by a total 110 basis points but most banks have not come close to following suit. While monetary policy can impact cyclical factors, it has its own limitations when the slowdown is structural in nature. As a result, investment-focused fiscal policy and active continuation of structural reforms become imperative at this juncture.
Though the government had in the Budget unveiled plans for a sovereign bond sale in the overseas market, not many are enthused. During her recent interaction with industry leaders, Finance Minister Nirmala Sitharaman responded favourably to the plea for stimulus measures. There is a need to initiate immediate steps to boost infrastructure investments, provide GST rate relief to some specific sectors like the automobile, cut red tape on cross-border trade and improve ease of doing business. The below-target tax collections, coupled with the fiscal glide path mandated by the Fiscal Responsibility and Budget Management (FRBM) Act, had constrained the government from providing a fiscal push in the Union Budget. However, a rethink is needed on the FRBM restrictions. The current economic scenario, where private investment has dried up, may warrant such a move. The biggest challenge now is to find a way to lift the sentiment and galvanise businesses. What the economy needs now is a policy stimulus in order to come out of its present deceleration. The country needs to embark on a virtuous cycle of savings, investments and growth to achieve the objective of 8% growth rate.