National Council of Applied Economic Research
There has been a decline in economic activity since the last fiscal. Both economic activity and inflation showed falling trends throughout 2018–19.
Akin to the rest of the world business uncertainty had increased in India post the Lehman bankruptcy in September 2008. A measure of volatility the standard deviation (SD) of the quarter-on-quarter (q-o-q) growth rate of the NCAER Business Confidence Index (N-BCI) was 8.7 between January 1998 and July 2008. Leaving out the third quarter of 2008 the SD of the q-o-q growth rate of the N-BCI increased to 12.6 for the period January 2009 to April 2019. This volatility was pronounced in the post-demonetisation period from January 2017 to April 2019 with the SD being higher at 13.5
There has been a decline in economic activity since the last fiscal. Both economic activity and inflation showed falling trends throughout 2018–19. The year-on-year (y-o-y) growth of GDP at market prices went up from 6.0 per cent in Q1 of FY18 to peak at 8.0 per cent in Q1 of FY19 before declining again to 5.8 per cent in the Q4 of FY19. Overall retail inflation had stayed at moderate levels at 3.6 per cent in 2017–18 and 3.4 per cent in 2018–19. Retail inflation fell from 4.8 per cent in Q1 FY19 to 2.5 per cent in the fourth quarter of 2018–19.
The available monthly leading indicators do not show much hope. The Index of Industrial Production (IIP) showed 3.4 per cent y-o-y growth in April 2019. Core IIP also showed higher annual growth of 5.7 per cent for the period April-May period versus 4.4 per cent in the corresponding period in 2018. However this was mainly driven by growth in electricity and steel sectors. As per the Society of Indian Automobile Manufacturers production of passenger vehicles commercial vehicles three-wheelers two-wheelers and quadricycles showed a de-growth of 9.31 per cent in the period April-May 2019. The Nikkei Manufacturing PMI also was lower in the first quarter of 2019-20 at 52.2 as compared to 53.6 in the corresponding period in 2018-19.
Retail inflation stayed at 3.0 per cent in both April and May 2019. Food and fuel retail inflation have also stayed benign. Merchandise exports and imports (USD terms) showed y-o-y growth of 2.5 per cent and 4.3 per cent in April-May 2019-20 on a corresponding basis. Services PMI has also fallen in the April-May 2019-20 versus the corresponding period in 2018-19 on a sequential basis. As per the Indian Meteorological Department the cumulative departure of rainfall for the country as a whole from June 1 2019 to July 1 2019 had been 31.8 per cent.
In one sentence despite interventions and improvements supply-chain bottlenecks continue to plague India. Plus there are weaknesses in both external and internal demand rural and urban. The financial sector in India will continue to act as a drag on economic growth at least in the short run.
What should the government do to address an economic slowdown amidst a period of economic uncertainty with limited fiscal space? The answer lies in a stable certain policy framework – boost investor and consumer sentiments address sector-specific woes and keep on working on the long-term challenges.
On the supply side the Government of India should continue to work on the Ease of Doing Business to promote FDI. The empirical evidence shows the open economies tend to grow relatively faster. Investments in physical infrastructure – transport energy and telecommunications – have to continue. Integrated water and land policies are important for both rural and urban areas.
The woes of the agricultural sector have been solved in a systematic sustained and holistic manner. Global warming is a certain in our economy implying that temporal and spatial variations in monsoon are going to be the norm rather than a departure from it. The detailed policy recommendations may be found in the Doubling Farmers’ Income report where NCAER was one of the Knowledge Partners.
As mentioned in the Economic Survey 2017-18 we need to focus on our current comparative advantage of labour-intensive industries like clothes textiles and apparel etc. and link it up with the export sectors to fuel both internal and external demand. Giving specialised attention to our border areas especially on the Eastern side which also happens to be the Aspirational Districts can fuel exports and internal demand. Opening borders with security protocols can encourage cross-border commerce thereby encouraging growth in these areas.
Bornali Bhandari Senior Fellow National Council of Applied Economic Research New Delhi is a guest contributor. Views expressed above are the author’s personal views.