Faltering growth

New Union Finance Minister Nirmala Sitharaman will have to hit the ground running because there is little doubt that the Indian economy is slowing markedly. There have now been three successive quarters of a slowdown. According to the data released by the Central Statistics Office on Friday, gross domestic product, or GDP, grew by only 5.8 per cent in the last quarter of 2018-19, between January and March. This is considerably less than was expected. After 8 per cent growth in the first quarter of 2018-19, the economy then posted growth of 7 per cent in the second quarter, between July and September of 2018, and 6.6 per cent in the third quarter, between October and December. This is clearly a broad-based slowdown. The National Statistical Office also cut its full-year growth estimate for 2018-19 from the estimated 7 per cent earlier to 6.8 per cent. The data suggested a broader slowdown cutting across sectors, confirming the fear that the current downturn is structural rather than cyclical. The last month for which the data was released, April 2019, showed that the rate of growth in the eight “core” infrastructure sectors was still slowing, down to 2.6 per cent as against 4.9 per cent.

Low growth in the last quarter of 2018-19 means the government can no longer claim that India is the fastest-growing large economy in the world — which was in any case a tag that concealed as much as it revealed, because many peer economies were in fact doing better than India. The new government thus has many challenges before it on the economic front. The official data showed last week that the unemployment rate in 2017-18 was 6.1 per cent, though officials contended that the data isn’t comparable with that of past years. There were many other indicators of a slowdown. In April, the manufacturing and services PMI, at 51.6 and 51, expanded at their slowest pace since August and September 2018, respectively. The capital goods segment of the Index of Industrial Production also contracted for the third consecutive month in April. On Saturday, India’s largest carmaker, Maruti Suzuki, reported a 22 per cent decline in sales in May — the lowest in seven years.

There are multiple sources of the current slowdown. One of these is the problem of overcapacity, which causes the private sector to go slow on investment, a major source of growth. Investment has also been retarded by questions about the flow of finance through the non-banking financial sector, which has not recovered from the shock to the system delivered by the default of Infrastructure Leasing & Financial Services on some of its debt. The government will have to prioritise cleaning up this sector in order to restore the flow of funds, since the sector had become a crucial source of debt finance for corporate India. A more open attitude to the world will also be necessary. Without a focus on exports, India will continue to suffer from questions of overcapacity. There is insufficient demand in India to justify a sharp increase in its productive capacity. Only becoming a location for exports to the rest of the world will be able to address the overcapacity problem. Exports have largely been muted through the government’s previous term. Ms Sitharaman will have to step up and renew the structural reform process if Indian competitiveness and exports growth are to salvage the growth story.

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