CNBC TV18 Column: The Indian Economy Quicksand

This appeared on the 26th of December

The protests around the Citizenship Amendment Act (CAA), the National Register of Citizens (NRC), and the National Population Register (NR) have provided a welcome respite to Finance Minister Nirmala Sitharaman who was facing increasingly uncomfortable questions about the state of the economy.

That the economy is nose divining is something that most people can see, either because they can read economic indicators, or because they are living through the downturn. There are stories of  unemployment all around. From the average daily wage worker who is finding it difficult to get paid work, to the corporate executive in his mid-forties who has been laid off, to the  young MBA graduate who has not yet been placed 18 months after graduation – most of us know at least one person who has no work. And, that is the first problem with the economy. There are not enough earning members, earning enough money.

The unemployment rate is pegged at 6.1% for 2017-18, has been the highest in decades. And, the problem of unemployment is far more acute in urban areas (7.8%) than in rural areas (7.8%). When people don’t have jobs, or are worried about losing their jobs, their tendency is to consume less and conserve more. This is simple human psychology, where we put away enough for a rainy day. However, even that is not coming to pass. We have with the problem of unemployment, a heavy dose of inflation, especially food inflation. Prices of staples – grains, pulses, eggs, meat, edible oil – are on the rise, and there seems to be no stopping the upward trend. When this happens instead of conserving or saving, the bulk of the income goes in food related expenses.

And there is the third whammy – that of industrial output that is shrinking, because entrepreneurs across the country have no risk appetite – also known as animal spirits – to invest. Factory output has been showing a month on month decline, for the last quarter. Gross Domestic Product (GDP) has shrunk  and every major institution that revelled in the India growth story, is now busy downgrading growth figures for the economy.

Anyone of these issues is serious enough for a government to take note, all three of them together is an indicator of serious trouble. And, the Government of India rather than tackling this head on, seems to be in denial on the basic fact that we are in the midst of a slowdown. A chorus of ‘all is well’ from the Government and its supporters in the media and online communities is coming in the way of finding solutions for a problem that is not imaginary. However, the desire to build statues seems greater than the ability to fix the economy.

It is in this context that you need to read the comments of Gita Gopinath, head of the International Monetary Fund (IMF). Her team has suggested that India hold off any fiscal stimulus to the economy, and wait for adjustments in monetary policy to pay dividend. They have further said that the achievement of a $ 5 trillion economy by 2024 seems improbable.

According to economic theory (More specifically Keyenesian economic theory) an inection of capital into the economy – from which ever major stakeholder , Individuals, Government, Industry, exports – would act as a boost to the economy as a whole, and multiply its effects across the economy. When individuals have no jobs, and industry has no money, this role falls on the government.  This is why in times of downturn, when animal spirits are low, governments across the world tend to undertake some form of fiscal stimulus to rekindle the economy. 

However, to ensure that Governments across the world do not spend themselves out of any economic mess, there are agreed on targets to ensure that the fiscal deficit stays within a certain threshold of the GDP. A fiscal deficit is the shortfall in the Government’s income, when compared to its expenses. The fiscal deficit does not include any shortfall made up via borrowings. Most countries, across the world run some form of deficit financing for the services and infrastructure that it provides citizens. In India the fiscal deficit target is 3.4%.

There has always been the tussle between the IMF and sovereign nations coping with their economic cycles. The use of fiscal stimulus to kick start the economy has always been a point of contention. For India to come out of the economic quicksand that it finds itself in, it needs to kick start the economy with a fiscal stimulus. However, IMF wisdom suggests that we hold on to our fiscal discipline and implement policy easing. However, policy easing shows impact in the medium to long run. And, India has an immediate problem with growth, inflation, and umemployment.

What can the Government do? Pretty much what any organisation would do when faced with such issues. Roll out the best team in the country – irrespective of party affiliation – get them to don their suits and go and meet international bodies, corporations, and funds – and get them to start investing. This is not merely promises of investment, rather it is actual implementation of the investment promises. Else the economy that we will leave behind for next generation will be a mess, and they won’t thank you for it.

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