India’s gross domestic product (GDP) grew 4.5 per cent in July-September 2019, broadly in line with trends emanating from most proxy and leading indicators.
When was the last time India’s real or inflation-adjusted GDP growth rate fell to below 5 per cent? It was in January-March 2013, when the economic expansion crawled at 4.3 per cent.
This was four-and-a-half years after the stunning collapse of Wall Street icon Lehman Brothers that plunged the world economy into its worst crisis in eight decades.
There are three striking similarities between now and then. One, in both instances, households putting off spending gave out early warning signals for the onset of an economy-wide squeeze. The clearest indications, both now and in 2013, were available in any market or mall.
Automobile sales contracted 6.7 per cent in 2012-13 versus a 2.2 per cent growth in the previous year, showing lower discretionary spending. The current situation is almost like a mirror image of six years ago. Passenger car, commercial vehicle and two-wheeler sales continue to languish and decline for nearly a year now.
Two, there has been a persistent decline in bank credit growth to small and medium enterprises (SMEs), the Indian industrial sector’s lifeblood. In 2012-13, bank non-food credit growth fell 5.6 per cent to medium enterprises. This year, until September 2019, bank credit growth to SMEs have fallen 1.3 and 3.8 per cent.
Three, and the most important commonality, is sluggish construction activity. Construction sector GVA in constant prices grew 2.9 per cent in January-March 2013. In July-September 2019 it grew 3.3 per cent, reflecting the strong compression in spending on roads, highways and ports, particularly in government expenditure driven projects.
That said, there are two very effective tools that the government doesn’t have now that it possessed in previous occasions, particularly in 2008 and 2009 to engineer a turnaround.
In 2008, as the tides battered coasts across global financial capitals, governments and central banks responded with stimulus packages on an extraordinary scale, to buoy demand and investment.
India too dealt with a string of fiscal interventions, announcing big tax cuts on consumer goods such as cars, aimed to lower prices and boost sales. Between December 2008 and July 2009 the government announced tax cuts for products and easier loans for companies to pump prime the economy that was struggling to breathe amid the global financial crisis’ piling rubble.
The option of immediate tax cuts on products is, however, not available now. With the goods and services tax (GST) that has consolidated a welter of indirect taxes into a single levy, the Centre no longer enjoys the discretionary fiscal powers to take such suo motu decisions.
On the corporate side, the government has already exercised the blunt option of slashing income tax rates for companies to an effective rate of 25 per cent, leaving very little fiscal manoeuvrability for an intervention if required later.
In 2008, on the supply side, the Reserve Bank of India (RBI) lowered rates with almost furious rapidity intended to bring down companies’ capital raising costs and bolster investment.
Between October 2008 and March 2009, the RBI lowered the repo rate — the rate at which banks borrow from the RBI — by 3.25 percentage points, from 8 per cent to 4.75 per cent.
In 2019, the RBI has already cut rates five times since February. At 5.15 per cent, current repo rate is 40 basis points (one basis point is 100th of a percentage point) shy of 4.75 per cent in April 2009, its lowest ever level.
In 2008, the results of fiscal and monetary stimuli did pay off, albeit only just. The recovery was not decidedly V-shaped, as a mix of external factors, including the rupee’s dramatic fall pummelled by the United States’s talk to wind down its quantitative easing programme, began to show up in 2012-2013.
The biggest factor, however, was the fiscal squeeze or the rolling back of India’s own stimulus package had on the economy. The government started raising taxes and the RBI raised interest rates to bring them back to 2008 levels and the cut down on public spending to rein in a widening fiscal deficit that had triggered stridently critical annotations from global credit rating agencies.
The result: the GDP growth fell to 5 per cent (later revised to 4.3 per cent) in January-March 2013.
The repeated interest rate cuts haven’t resulted in a commensurate rise in investment or demand. One would reckon that there be one more round of rate cuts, before the RBI hits the limit of monetary easing.
The onus is squarely now on the fiscal side. It is now North Block’s time for doing the heavy lifting. Frontloading and raising public expenditure on construction activity can be a good first step to release immediate multiplier effects on spinning new jobs and creating income.
Importantly, the government should now decisively turn the focus on the vast consuming middle and salaried class to be the engines of growth. It is finance minister’s time to go for broke and put more money in their hands through tax breaks, enabling them to spend more.
India cannot possibly be in a situation where the highest effective individual tax rate at 43 per cent is nearly double the highest corporate income tax rate. This peculiar fiscal architecture needs immediate fixing.
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