India’s gross domestic product (GDP) will grow 6-6.5 percent in 2020-21, the Economic Survey 2019-20 projected on January 31, tempering expectations of a rapid economic recovery that will require a wide-ranging policy prescription to nurse multiple wounds.
The Survey, the second one authored by Chief Economic Adviser Krishnamurthy V Subramanian, flagged sluggish household spending, embattled non-banking finance companies (NBFCs), a wobbly world economy and lower tax revenue collections as the main pain points that need intensive care.
It argued in favour of counter-cyclical fiscal measures to arrest the current slide, which may be seen as a nudge to the government to lower taxes to boost demand.
In times of slowing demand and falling growth in the economy, counter-cyclical fiscal policies typically could entail reducing taxes and increasing expenditure to create demand and producing an upswing in the economy.
The Survey’s no-holds-barred account made a strong case to quickly launch a fresh round of bold policy and legislative reforms to remove rigidities and eliminate cronyism that will enable speedier on-ground investment in newer areas beyond the usual concentrated economic hubs.
“India’s aspiration to become a $5 trillion economy depends critically on promoting a ‘pro-business’ policy that unleashes the power of competitive markets to generate wealth while and weaning away from a ‘pro-crony’ policy that may favour specific private interests, especially powerful incumbents,” the Survey said, as it laid down a blue print to turn India into a $5 trillion economy by 2024, which would require moving beyond the business-as-usual policy approach.
The NBFC sector, which has been struggling to stay solvent amid a piling rubble of collapsing asset values and growing loan defaults, came out for extra emphasis in the Survey.
The shadow banks’ revival is crucial to sustain economic activity in several sectors including real estate, automobiles and micro, small and medium enterprises (MSMEs) — the lifeblood of India’s manufacturing sector.
These lenders are looking to first address their own balance sheets, even if it has come at the cost of restricting credit outflow, considerably slowing down NBFC loans to these sectors, affecting their investment and business plans.
Following payment defaults by subsidiaries of Infrastructure Leasing and Financing Services (IL&FS) and Dewan Housing Finance, investors in liquid debt mutual funds (LDMFs) ran collectively to redeem their investments.
In fact, the defaults triggered panic across the entire gamut of NBFC-financiers, thereby causing a funding (liquidity) crisis in the NBFC sector.
“Problems faced by the NBFCs stemmed from their over-dependence on short-term wholesale funding from the liquid debt mutual funds,” the Survey said.
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The emphasis on NBFCs comes a day before Finance Minister Nirmala Sitharaman presents the Union Budget for 2020-21. There are expectations that Sitharaman will announce some kind of a relief package, modelled broadly on the lines of the US’s Troubled Assets Relief Program (TARP) that may involve setting up setting up special purpose vehicle that the Reserve Bank of India (RBI) will administer to buy out NBFCs’ stressed assets.
Recovery in slower laneIndia's gross domestic product (GDP) grew 4.5 percent in October-December and is estimated to expand at 5 percent in 2019-20, the lowest annual growth rate in 11 years, buffeted by a crippling industrial deceleration and weak household spending.
The Survey acknowledge the slide, reiterating the 5 percent growth projection for this year.
Slowdown signs have been visible since last year. The national income data have reinforced deceleration signs that were emanating from a slew of shop-end data, such as car and consumer goods sales, often seen as proxy indicators to gauge trends in household spending.
The primary challenges on the fiscal front in 2020-21 remain lower tax revenues hammered by slower-than-expected growth and setting aside extra funds for welfare schemes such as PM-KISAN ( a farmers’ income transfer scheme) and NREGA ( a rural job guarantee programme) without compromising the fiscal deficit target.
Infrastructure projects that have strong multiplier effects across intermediate industries such as cement and steel and has stronger propensity to create jobs for the unskilled and the semi-skilled will have to do the heavy-lifting for a speedier revival.
Higher government spending on infrastructure projects would crowd in private investment, the Survey said, hinting the government to do much of the heavy lifting to revive growth.
According to the Survey, investment, especially private investment, is the 'key driver' that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.
In a fast moving world India has to develop its industry and enlarge the scope for Industry 4.0. That will encompass automation in industrial sectors, the Survey said.
