SEPTEMBER 02, 2019

By TIOL Edit Team

"THE key question that confronts the Indian economy as it looks ahead to the rest of 2019-20 is: are we dealing with a soft patch, or a cyclical downswing, or a structural slowdown?" "What ails the animal spirits?"

When Reserve Bank of India (RBI) puts such questions, it is time to revisit economic slowdown that is hurting us all. The revisit becomes compelling at receipt of news about alarming deceleration in growth of gross domestic product (GDP) in the first quarter of current financial year to 5%, an over six-year low.

The positive aspect of this whole introspection exercise is that it is accompanied by limited fiscal announcement and banking reforms unveiled separately by Finance Minister Nirmala Sitharaman.

The silver lining in slowdown cloud is also brighter with RBI deciding to transfer Rs. 1.76 lakh crore from its reserves to the Union Government. It should primarily be used to fight slowdown. A part of it can be set aside as national security contingency fund. It should be a non-lapsable fund.

As for 1 st question, RBI addressed it in its annual report for 2018-19 released on 29th August. It says: "This (slowdown's diagnosis) will determine the policy responses - illustratively, a soft patch can be looked through, while a cyclical downswing will warrant counter-cyclical actions in terms of monetary and fiscal policies, but a structural slowdown will need deep-seated reforms".

The Report continues: "The diagnosis is difficult; these conditions are hard to disentangle cleanly, at least in the formative state. Proximate answers could perhaps be found in the lessons of the experience of 2018-19, with which it could be feasible to assess the outlook for 2019-20 and the challenges that lie ahead".

RBI believes slowdown started as a soft patch. It is now mutating into a cyclical downswing, rather than a deep structural slowdown. The Government has to, however, resolve structural issues in land, labour, agricultural marketing and the like.

As put by the report, "The disaggregated analysis confirms that a broad-based cyclical downturn is underway in several sectors - manufacturing; trade, hotels, transport, communication and broadcasting; construction; and agriculture".

We can thus conclude that slowdown is multi-faceted. Hence the need for multi-pronged solutions to the problem. These include monetary, fiscal, regulatory, sector-specific concerns and issues that fall in the domain of environmental-judicial activism.

We urge the Government to adopt a holistic and transparent approach in tackling slowdown. It should guard against influential sections in the corporate sector that lobby well to pitch their demand for sops through multiple channels.

A simple norm for deciding relief can be identification of sectors that have performed worst in term of sales growth as compared to sales average for five preceding years. Another factor in deciding relief can be the extent of employment sustained by slowdown-battered sectors.

Yet another issue that Government must address is the impact of tightened environmental & revenue regulations on oil, power, mining, telecommunications and automobile sectors. To what extent the change in norms increase cost of products and services. What is the resulting impact on the sales and profits in the relevant industry. After all, all these changes impact economic growth including revenue receipts.

It is here pertinent to quote Suzuki Motorcycle India Managing Director Koichiro Hirao. The other day, he told a business daily that Government recent announcements would help improve liquidity in the market, but introduction of higher safety standards and insurance costs have already raised two-wheeler prices by 15%.

He pointed out that the switch-over to Bharat Stage VI standards next year will raise bike prices by up to another 20%. Two-wheeler sales would thus remain under slowdown shadow for next two years.

The Government must thus be clear about the impact of macro or sector-specific policy and regulatory changes on GDP. Reforms must be properly sequenced and converged to reap their synergetic, positive impact on GDP and jobs.

It must reflect over NITI Aayog Chief Executive Officer Amitabh Kant's observation. In the first week of August, he stated that a spate a wave of reforms undertaken by the Government contributed to slowdown.

Too frequent and too many changes in business eco-system creates uncertainty and puts off or delays fresh investments. The impact of policy uncertainty has been addressed well, both in the Finance Ministry's Economic Survey (ES) for 2018-19 and RBI's annual report.

ES explained well how uncertainty affects businesses due to a botched, legal reforms. As put by it, "Consider, for instance, a poorly drafted law that is riddled with ambiguities, amendments, clarifications and exemptions that inevitably lead to conflicting interpretations and spawn endless litigation. Needless to say, such uncertainty can spook investors and spoil the investment climate in the economy. Such uncertainty in economic policy can be avoided".

RBI annual report highlighted the issue well by carrying a box item. It is headlined: "Policy Uncertainty Index for India - Big Data Analysis".

Unlike risks whose probability can be assessed, uncertainty is unobservable. The Box notes: "Uncertainty prompts consumers and producers to alter their behaviour in terms of spending, investing and hiring decisions".

It concludes: "uncertainty negatively impacts investment activity in India".