Macro Matters | The Prime Minister says he will do whatever is needed to revive animal spirits

The Prime Minister’s swift response to the concerns that businessmen and investors have recently had about the deceleration in economic growth is commendable. Since the Union Budget, the markets have been worried that the Modi government in its second term may not be giving the economy the attention it deserves and that its social agenda may be overshadowing its economic one. The Prime Minister’s interview with the Economic Times aims to dispel that notion, improve sentiment in the markets, provide comfort to investors and lift the flagging spirits of entrepreneurs. That it was the Prime Minister himself who chose to talk about the economy, rather than the finance minister, is a gauge of the seriousness with which the government views the malaise that has recently gripped the economy. The key message from the interview is the following: ‘We are willing to go as far as needed to ensure that ‘animal spirits’ are revived and our entire private sector is bullish.’

The Prime Minister has in the interview laid down the road ahead for the economy. He said that the vision for the next five years is to have investment-led growth. He spelt out that this would mean more liberalisation of foreign direct investment, simplification of labour laws, power sector reforms, lowering of tax rates, asset monetising and asset recycling in the public sector and further reforms in banking, insurance and the pension sectors. Enhancing the ease of doing business further has of course been a long-standing goal. Moreover, he said that the private sector will be the engine of growth, but the government will support it by ‘crowding in’ investments. In short, the prime minister has comprehensively touched upon almost all the areas flagged by economists as needing the government’s attention. The focus on the private sector as the driving force of economic growth is clear and the references to asset recycling, whereby proceeds from the sale of public sector assets are utilised for creating new assets, has been a key recommendation of many policy analysts.

The PM has also offered his diagnosis of the slowdown in demand. He said that there have been international as well as domestic headwinds, the latter caused mainly by credit constraints. He believes we are at the last stage of the downward leg of the credit cycle and that recapitalising banks and encouraging them to lend to non-banking finance companies will improve credit flow and secure the trust of the markets.

On specific sectors most affected by the slowdown, the PM pointed to the many measures taken to boost demand in the housing sector. But his main message is that the slowdown is transient and that these sectors will revive with the economic recovery. He said it is just a matter of time before we see the private sector booming again.