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THE STATE OF THE ECONOMY

By Varun Hari Prasad


THE STATE OF THE ECONOMY


In three weeks from now, the Finance Minister will present the Union Budget for 2018-19, the last full budget of this Government before the 2019 general elections. A couple of days ago, the Central Statistics Office published the first Advanced Estimates of National Income for 2017-18. This is, therefore, the right time to review the state of economy.

Agriculture

Agriculture has been in acute distress for a long time, especially since November 2016. Drought, floods and cyclones have further complicated life for farmers. With calls for farm loan waivers falling in deaf ears, the crisis has worsened. The Gross Value Addition (GVA) for agriculture and allied activities has been projected at 2.1 per cent in 2017-18 compared to a growth of 4.9 per cent in 2016-17. Total food grain production in Kharif season of 2017-18 fell by 3.85 million tonnes and stood at 134.67 million tonnes. The sown area for Rabi crop has seen a decline of 0.2 per cent.
                              

                                  

Industry

No country can boast of a strong economy without a robust manufacturing sector. The GVA from manufacture sector is estimated to grow by 4.6 per cent this year compared to a growth of 7.9 per cent in 2016-17. The Index of Industrial Production (IIP) grew by 2.2 per cent during April-October 2017 against an expectation of 3 per cent. Slower industrial growth leads to slower infrastructural development besides decreasing the pace of job creation.

Investment

Investment continues be sluggish with the National Investment rate declining from 37 per cent to 28 per cent. People’s hesitance to deposit their money in banks can be seen in the sharp decline of National Savings rate. Credit offtake by industry has fallen to a 60 year low and new project announcements by Indian companies have dropped to a 13 year low. The Gross Fixed Capital Formation (GFCF) has fallen from 37 per cent to 28 per cent.

                                  

Unemployment

Unemployment has been an intensely discussed issue off-late. Since the implementation of demonetisation and GST, approximately 30% of the businesses in the MSME sector have closed down. It is now widely accepted that 33% jobs in the informal sector (which employs 90% of India’s workforce) have been washed away. The Labour bureau data indicates that job creation has hit an 8 year low. With the slowdown persisting, job creation may continue to stagnate.

Fiscal Management

The Fiscal deficit at the end of November 2017 itself was 12 per cent more than the Budget estimate for the whole year and in all likelihood it may end up even higher as the Government is under pressure to increase expenditure despite lower revenues. The Current Account Deficit which was below 1 per cent (at about 0.8 per cent) has soared to 1.9 per cent of GDP. To make matters worse, the public debt to GDP ratio has also seen a sharp increase.

With the upcoming Budget being the last full budget before the 2019 General Elections, the government may choose the populist road causing a further stress on fiscal management.

The Implications of Slowdown

 The fall in GDP from 8.0 per cent in 2015-16 to 6.5 per cent (estimate) in 2017-18 clearly captures the downward trend in the economy. A decrease in growth of economy, even if it is a small one, leads to destruction of millions of jobs and lives. It could also create anxiety and anger in minds of people and lead to undesirable events, some of which are already being witnessed.

The Road Ahead

With banks unable to lend and the private sector unable to invest money, the Government must increase public expenditure, especially capital expenditure, in order to stimulate economic activity. The Finance Minister should also consider a complete overhaul of the GST regime and in the meantime reduce GST rates so that all kinds of consumers and producers benefit from it. 

With 2016 and 2017 being turbulent for the economy, 2018 seems to head in the same direction. However, if the political class are able to evolve consensus on at-least ten steps that could be taken to put the economy back on the 8-9 per cent growth trajectory, it would provide the much need boost to India and the world beyond it. 


Sources: Centre for Monitoring Indian Economy
              Press Information Bureau, Government of India
              Quarterly Report on Public Debt Management, Ministry of Finance

*Views expressed are personal
               

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