Gradually decreasing quarterly GDP hits below 5 percent mark along with contracting IIP(Index of Industrial Production), slow credit growth and manufacturing slow down.
Decline of gross fixed capital formation to 28 percent indicates cut on savings and investments hence lack of demanding consumption.
Below than targets GST collection n borrowing limitations to meet fiscal deficit has further tied govt hands to go for capital expenditure.
Demand Slowdown and its reasons
Consumer demand is sluggish across sectors from FMCG to automobiles.
Reasons
1.Income growth has been slow specifically in rural India, where 70% population resides.
2.Liquidity crunch, started specially after IL&FS crisis which further spill overs and halted the overall financial system. This leads to failure of monetary policy, also due to liquidity crunch and demand could not pick up despite lowering rates.
3.No focus on demand side. Till now govt measures are taken to address supply side. for example :- a) rate cuts, to increase credit supply.
b) corporate tax rate cuts, to increase the production and investment.
4) Insignificant income growth, leads to cut in savings and investment that is reflected in depletion in household GFCF(Gross Fixed Capital Formation) much more than that of public and private sector.
5) Govt Policies – a)Axial norms, created a demand slump in commercial vehicle segments as a fleet owner can now transport more load than earlier norms.
b) BS VI (Bharat Standards) from April 2020. Possibly, buyers are delaying for that and waiting to have BS VI variants instead of BS IV because fuel and lubricants, etc will be as per BS VI.
Catch-22 situation on Tax collector and expenditure targets
1) GST collection grew at 10-11% only against a target of 18-19%. But govt cannot increase tax rates as being an indirect tax it is regressive in nature n is potent enough to slump consumer demand.
2) Big cut in corporate tax has further reduced the revenue collection and corporate tax cut success in boosting investment completely depends upon the demand in economy. Without demand, investment by private sector will not be done.
3)Income tax cut. This did not work because nearly 2 percent of population pays income tax and in order to reduce it, it must be increased as it is progressive in nature and direct taxes already has lesser size than indirect taxes in Indian economy which is against global norm.
Some positive steps taken :
1) OPERATION TWIST by RBI. Success in monetary policy transmission and liquidity crunch is achieved to a level.
2)National infrastructure pipeline. policy map for 1 lakh crore infrastructure projects full stop a growth pole and leading sector infrastructure instruments will boast multiple sectors like cement iron and steel heavy engineering vehicles along with job creation.
Steps needed to be taken
A) To increase the income
1) Inflation indexing of MGNREGA wages and increased MGNREGA’s mandatory job from 100 days to 150-200 days.
2) Implement MinimumWages Act based upon Anoop SatpathyCommittee.
B) Fiscal stimulus should complement monetary steps taken by RBI
– FRBM Act provides leeway to breach the fiscal deficit target of 3 percent.
C) Economic prudence in govt expenditure
1) consumption expenditure should be reduced and capital expenditure should make the larger part of deficit spending.
D) Public Sector investment in R&D .
Better research utilisation is again a major factor to have higher GDP growth even with low investment.
E) Structural Improvements for long term solution.
1) Rationalised GST as soon as possible so that returns would be stable.
2) Policy formulation must address all factors of production- land, labour capital unlike capital which gets overdue attention.
Conclusion
Present shoot in retail inflation beyond RBI’s mandate of 6percent and alltime high unemployment rates of 8.1percent as per NSSO brought India to the brink of stagflation. With golden opportunity of harnessing demographic dividend, India should act swiftly without any more hit and trial.
This article has been contributed to us by our friend, Kamal Sharma. sharma.kam94@gmail.com
Upbeating Life 