A ray of hope in 2018

Efficiency of delivery by cutting red tape should be the top priority this year.

 2018, GDP, growth, Indian economy, Union Budget, IMF, ADB, non-performing assets, GST, oil prices, RBI, hope, business, economy, welfare, India, Swachh Bharat, CAG
Source: PTI

India is going to be the fifth largest economy in the world in 2018, according to the forecast of a global business agency. The rise in GDP growth in the second quarter (Q2) of 2017-18 (July-September) to 6.3 per cent from 5.3 per cent in the first quarter (Q1) (April-June) has already been celebrated because it signals that the slide in GDP growth over previous five quarters has been arrested. The obsession with GDP growth rate will remain with the government in 2018. But it must be realised that a small increase does not show that all is well with the economy. There are still deep rooted structural problems that need to be addressed in order to increase the welfare of the people along with a rise in GDP growth. GDP growth in 2018 will probably be in the range of 7 per cent as predicted by the IMF and ADB.

While manufacturing growth has picked up in Q2 to 7 per cent which augurs well for export growth which rose in November 2017, agricultural growth is experiencing a slowdown at 1.7 per cent which means there will be persistent problems of unemployment in the rural areas. The real cause of the slowdown is deep and needs to be addressed.

Finance Minister Arun Jaitley said in a recent interview that in the next Union Budget, which will be the last one before the general elections, the focus will be on infrastructure and the rural economy. It will be tough going for the rural economy because mitigating farmers’ debts will be difficult. It will also affect consumer demand for manufactured goods in 2018. Clearly loan waivers are not a panacea for the rural sector and issues like crop insurance, higher minimum support prices that give better returns to farmers, irrigation, storage and reduction in transportation costs have to be addressed this year.

No doubt more public investment is needed in infrastructure and stalled projects have to be revived. But why is Indian industry not borrowing from banks when banks are full of liquidity? It is a problem that has two sides — banks are reluctant to lend due to their own balance sheet problems and even with the recent huge recapitalisation pledge for banks by the government, their balance sheets are not in order. The industrialists on the other hand are not willing to borrow at the current high rate of interest when the returns to investment are not promising especially when they are experiencing a high debt overhang.

A mountain of NPAs (non-performing assets of more than INR 8 lakh crores) has also led to a much lower credit offtake. Credit growth has remained low at 7.7 per cent. On the whole credit offtake will depend on industrial growth accompanied by better capacity utilisation and health of the banking sector specially the public sector banks.

The Reserve Bank of India (RBI) is not likely to cut the interest rates soon because at the end of 2017, 96.1 per cent of the fiscal deficit had already been met. The Government’s additional borrowings of INR 50,000 crore are likely to be inflationary. Also the impact of the salary hikes due to the implementation of the 7th Pay Commission awards and rising oil prices are bound to fuel inflation this year.

Higher oil prices will increase costs and reduce margins for industry in 2018. During the last few years, the fall in oil prices offered a bonanza for industry and provided an unusual push to manufacturing growth.

External demand is still weak even though there has been a positive growth in global trade and investment. Consumers in India are still recovering from the twin shocks of demonetisation and GST which created a disruption in the small and medium industrial sector. Incidentally, the rise in manufacturing growth does not correctly reflect this disruption because it takes into account only big factories’ outputs.

In the past few years the economy was driven by consumer demand which has lost its momentum because public sector spending which constitutes the biggest proportion has been reduced. Due to slackness of demand, capacity utilisation of manufacturing units has not been enough to trigger an appetite for capital goods. Capacity utilisation levels have been declining over the last few years especially in key manufacturing sectors such as power, automobiles and cement.  It is also preventing industrialists from undertaking fresh investments. Gross capital formation on the other hand dropped from 40 per cent in 2010 to 26.4 per cent of the GDP in 2017 — a serious problem that the government has not been able to reverse. New investments have however risen a little in Q2 to 4.7 per cent which is higher than the dismal 1.6 per cent rise in Q1. But demand for fuel is declining which is a sure indicator that the economic slowdown will continue into 2018.

As a result of the slowdown, very few jobs were created in 2017. Contrast it with the number of job seekers in India today which is around 1 million a month. The main challenge facing the government today is job creation and skills formation — something the Prime Minister is well aware of. Also, there may be many jobs available but the applicants turn out to be unemployable. Skills development has to be speeded up both through private and public sectors’ initiative.

The service sector could however offer a ray of hope for job seekers even though it grew only at 6.6 per cent in Q2, slower than the 8 per cent growth in Q1. In areas like trade, hotels, transport and financial services, growth rates are up. Tourism, personal services, healthcare are areas in which people with low skill levels can be employed. The construction industry also generates jobs for the semi-skilled but its growth has slumped to 2.6 per cent.

The government has to pull up its socks in the face of a rising fiscal deficit and not launch more populist schemes. It has already got quite a handful of schemes for which it levies cess on the common person. According to the recent CAG report, the government has not utilised 45 per cent of the funds collected under six major cesses as these were not transferred to the intended schemes like Swachh Bharat. Thus efficiency of delivery by cutting red tape should be the top priority in 2018 rather than claiming bravura for more schemes.


This commentary originally appeared in The Tribune.

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Jayshree Sengupta