With the din and dust of elections subsiding, renewed focus on growth is returning to trade, industry and commerce as part of the busy season. It is time to work out strategies to sustain early signs of the revival of the economy seen in GDP growth of 6.3% recorded in Q2 of FY18. While the medium and long-term prospects of the economy are poised for growth beyond 7%, short-term challenges are overwhelming.
According to the Centre for Economics and Business Research, India is well poised to be the 5th largest economy in 2018 in dollar terms, up from the current 7th position. surpassing the UK and France. It can also become the 3rd largest economy by 2032.
Further, the United Nations (UN) in its report projects growth at 7.2% in 2018 and at 7.4% in 2019. Even the downgraded estimate of the World Bank puts the growth at 7% in 2018 and 7.2% in 2019 whereas the IMF is more optimistic at 7.4% in 2018. The Asian Development Bank (ADB) and the Organization for Economic Cooperation and Development (OECD) have cut the growth estimates to 7.4% for fiscal 2017-18. The views of global agencies converge towards not less than 7% growth and prospects of higher growth in coming years.
Keeping the emerging challenges in view, the RBI in its 5th bimonthly monetary policy review lowered the projection of GDP growth to 6.7% and raised inflation estimates in the range of 4.2% to 4.6%. But immediately thereafter the Consumer Price Index (CPI)-led inflation suddenly climbed to 4.88% in November, recording a 15-month high, from 3.58% in October. The spurt was attributed to food products, particularly vegetables and fuel prices. Moreover, the fast cruising crude oil prices towards the $65 per-barrel-mark in international markets can challenge fiscal deficit and fuel inflation.
The RBI may have to coordinate with government agencies to address supply-side dynamics to tame inflation within the glide path, so as not to exceed the 6%-mark. The Index of Industrial production (IIP) too dipped to 2.2% in October from 4.1% in the previous month. Potentiality of economic growth jaded under the lingering impact of demonetisation and prolonged disruption caused by the GST needs to be tackled appropriately.
Subdued agriculture performance, impact of natural calamities and resultant farmer woes have to be addressed, maybe by reviewing the Minimum Support Price (MSP) and providing other reliefs. According to rating agency ICRA, the gross value added (GVA) growth is set to reach 6.5% in FY18 and 7% in FY19
Flow of Bank Credit
Seamless flow of credit to productive sectors is the sine qua non to stimulate rural growth and generate employment in the informal sector. One of the objectives of sustained efforts for financial inclusion is to disseminate credit to all entrepreneurs operating at the bottom of the pyramid.
But annualised credit growth by public sector banks touched a historic low of 2.1% in H1 (April-September 2017). PSBs have a wider reach in the hinterland. As against it, private banks recorded a credit growth of 19% during the same period. Since the reach of private banks has an urban bias, credit deprivation is experienced more in rural areas, which are still convalescing after demonetisation. Though there is some uptick in bank credit now, its distribution to various sectors is not concrete.
The reason is the protracted indifference of PSBs towards credit offtake due to their internal challenges. Many medium and small PSBs are reeling under the Prompt Corrective Action (PCA) framework of the RBI. They are intensely engaged exclusively in improving asset quality. Banks are also struggling with the nuances of Insolvency and Bankruptcy Code (IBC). Many other better PSBs are more focused on lending to retail and large sector with a truncated focus on middle and lower strata of the economy who, besides contributing to the GDP growth, significantly contribute to employment generation. Making available institutional credit is essential to keep the economy ticking.
Besides stimulating infrastructure spending, encouraging private investments, reviving stalled projects and some quick micro strategies can rejuvenate the economy:
* More than interest rates, ensuring a hassle-free flow of bank credit to labour-intensive agriculture, small and medium enterprises is a must
* Monitoring of disbursement of fresh credit to the needy rural sector is to be strengthened at a central point
* GST Council and government agencies may have to provide more relief to the small sector who are forced out of business as the new regime continues to be a puzzle for many. Grassroots level entrepreneurs are semi-literate and not tech-savvy and cannot afford to engage qualified employees. Many of them have lost business connections with their big buyers who simply refuse to transact with entrepreneurs not possessing GST number though they come under exemption
* The implications of the recently initiated E-Way bill to be generated by GSTN are to be examined to avoid further disruption to interstate movement of goods. Free movement of physical goods, more particularly perishable food items, is essential to quell price rise in local markets that can fuel inflation
* GST Council is an apex forum. It should form institutionalised granular forums, which should mingle with small entrepreneurs at various geographies to obtain operational level feedback and address them quickly
* Efforts should be to ensure that no business entrepreneur who was engaged earlier in business is out of it. Otherwise dip in GDP and loss of employment will be a natural consequence
It is time to dissipate ideological differences and constructively take coordinated steps with close monitoring of outcomes to harness the growth potentiality and prepare for an 8% sustained growth as envisaged in the UN report. Losing opportunity will tantamount to allowing faster slippage of growth. The present inflation and interest rates are still in consonance with growth dynamics provided hand-holding for enhancing productivity by stakeholders concerned is fast-tracked.
(The author is Director, National Institute of Banking Studies and Corporate Management, Noida)