Prime Minister Narendra Modi declared in Seoul that the fundamentals of the Indian economy are sound
. True, but ignoring certain troubling signs in the Indian economy may not be the right path for the government at the present juncture. Globally today, there are a number of stressed economies and India too seems to be caught in a bind over some important issues. India may be seen as chugging along at a relatively high rate of growth of around 7%, but looking at some core economic fundamentals, there is a need for immediate attention. Near the election times, the NDA government will of course claim credit for having a sustained high economic growth over the last five years, but it needs to take action to avert coming troubles if it wishes to return to power.
Globally, the US economy is slowing down and most importantly, China is showing signs of intractable slowdown which will hit and affect all, including India, because of its size and importance in the global economy. Germany, Italy and Britain are also showing signs of slower GDP growth currently.
READ: Time to take up issues of marginal farmers
In India, agriculture remains stressed as food inflation remains low. As a result, earnings of farmers are smaller than before. There has not been the promised doubling of incomes. Farmers generate demand for industrial goods and the agricultural population plays an important role. Their demand for two wheelers, mobile phones, agricultural machinery, consumer goods and gold are important for resuscitating industrial growth.
In India, agriculture remains stressed as food inflation remains low. Earnings of farmers are smaller than before.
Because low demand has remained a problem in the economy, the government has rightly reduced interest rates by 0.25% to 6.25% on grounds that the rate of inflation has remained low over an extended period. It will act as a stimulus that the economy needs specially in boosting private investment. Low level of private investment is responsible for the slowdown in industrial growth.
The government also offered basic cash income of ₹6,000 per year to farmers in the interim budget. However small it may be, people in the villages would welcome it because farmers suffer from ‘money illusion.’ Cash in hand makes them feel richer and raises their demand for goods.
READ: ‘Dream state’ comes alive
Apart from agriculture, India Inc. is not doing well. The Business Standard reported
that the declared corporate results have been unusually poor. The third quarter (Q3) profit results for the current year shows a pattern of slowdown experienced in other countries currently, marked by falling margins. In India, the moderation in economic activity manifested itself in lower air passenger traffic, low vehicles sales, smaller capital goods production and in general deceleration of industrial growth. IIP growth and export growth have both been lower than before recently. Export growth is likely to face hurdles because according to a recent report by WTO, International trade has been shrinking mainly due to the trade disputes between the US and China. India is also likely to face problems in its pharmaceutical exports to the US as it is preparing to impose various trade barriers on its trade with India.
The government also offered basic cash income of ₹6,000 per year to farmers in the interim budget. However small it may be, people in the villages would welcome it because farmers suffer from ‘money illusion.’
In the corporate sector, the combined net profits of 2,338 companies was down by 28% year on year compared to Q3 in FY18. The combined net profits of 2005 companies (excluding gas and non-banking finance companies) were down by 39.7% to ₹47,500 crore which is the worst performance in the last three years. Many famous names suffered losses like Tata Motors, Vodafone Idea, Punj Lloyd and Adani Power because of slow growth of revenues compared to expenditure.
Fortunately, the service sector has remained buoyant and the IT industry clocked reasonable net profits of 6.7%. Globally India is competing with IT companies from other counties in markets abroad. The depreciation of the rupee has cut into their margins.
The banking and finance sector remained under duress though there has been recovery and profits of banks in the last quarter were at ₹900 crore. But many public sector banks posted net losses. Since China’s slowdown, there has been a downswing in commodity prices as its demand for metals and other raw materials has fallen. Hence our metal and mining industries may not do well in the future. Rise in crude oil prices is also an imminent threat to India’s current account deficit which may widen if imports of oil become costlier.
Foreign investors will wait and watch the election outcome before making fresh commitments.
On the fiscal front, the offering by the Reserve Bank of India (RBI) to the Government its surplus funds of ₹28,000 crore has been a welcome boost to bringing about macroeconomic stability in the economy as the money will help in bridging the gap in the fiscal deficit target of 3.4% of GDP which the Government could not have met otherwise, especially with low prospects of a big GST revenue collection. Meeting the fiscal deficit target is important and will help India retain a good rating by the international credit rating agencies. It will help India to raise capital in the international capital markets to bridge the infrastructural gap India faces vis-a-vis China. Poor infrastructure makes us a third world country.
Foreign investors will wait and watch the election outcome before making fresh commitments. The FDI flows have already decreased as some FDI has been put on hold. A stable government is important as a result of the elections in May 2019 and an assurance of reformist policies by the new government will help investors make up their minds.
Rising government expenditure has played an important role in recent times to keep the economy rolling. Elections will witness a substantial rise in government expenditure which may further boost demand!
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.