- India‘s economy continues to decelerate with the government’s estimate for first-quarter gross domestic product (GDP) pegging growth at a 13-quarter low of 5.7% in April-June.
Reasons behind the protracted slowdown
- A slide of five straight quarters from 9.1% in March 2016 is many and varied.
- With little doubt the demonetization exercise combined with the uncertainty around the July 1 adoption of the new indirect tax regime served significantly to dampen economic activity.
- It is still doubtful whether demand for industrial output is going to attain any meaningful strength.
- The Reserve Bank of India last month said that its industrial outlook survey had “revealed a waning of optimism in Q2 about demand conditions across parameters and especially on capacity utilization, profit margins and employment.
- A look at the sector-specific trends shows that manufacturing expansion in gross value added (GVA) terms has slackened to a near stall at 1.2%.
- This, from 5.3% in Q4 of the last fiscal and 10.7% a year earlier, is a far from heartening sign.
- With capacity utilization expected to weaken this quarter, according to the RBI, and with surveys suggesting that consumer sentiment has deteriorated steadily in August, the auguries for a demand rebound are far from promising.
Words of Finance minister
- The Finance Minister has acknowledged that the challenge before the government now is to work out both policy and investment measures to boost momentum.
What measures can be taken?
- One option would be to suspend the fiscal road map for a limited period in order to pump prime the economy through increased capital spending by the government.
- The risks of fiscal undoing are manifold, especially at a juncture when several State governments have either announced or are contemplating large-scale farm loan waivers, which would push up interest rates and crowd out fresh lending.
- Still, there is a thin sliver of a silver lining in the GDP data. The services sector continues to remain buoyant.
- Quarterly GVA across this broad wrap up trade, hotels, transport, communication and broadcasting accelerated to 11.1%, from 6.5% in the fourth quarter, faster than the 8.9% posted in the corresponding period last year.
- The civil aviation sector saw passenger traffic soaring by 15.6%, and construction activity, a provider of jobs, also ticked up by 2%.
- The Finance Minister is on his way to find ways to restore momentum before the tailwinds of low inflation and affordable energy prices start reversing direction.