The economy has been slowing for a while now. It started well before the elections and that was a worry as it may have impacted the prospects of the BJP in the polls. They survived thanks to the the social welfare measures like toilets, gas, housing and direct benefit transfer.
The economy has slowed further now and hit low growth figures. The opposition friendly media and economists are calling it a recession. This is laughable and they know it too. There is no negative growth, just slow growth. A recession requires two successive quarters with negative growth.
Before i go into possible causes. I have written a piece in May 2019 on what the economy needs and if you have the time do read it. The points mentioned are still relevant. It is posted in the same blog and the link is below (please copy and paste)
Coming to current situation. The GST collections for November 2019 have again gone past 1 lakh crore suggesting there is an increase an economic activity – whether this is sustained or not we have to wait and see. Unlike in the past when the eceonomy was slowing and there was policy paralysis and drift the current government is constantly trying to intervene. Major changes will take time to have a result but they have done major interventions like corporate tax cut and lower tax for new investments and a real estate fund.
My take on the the reason for the slow down is two fold.
1. Continuing impact of the GST -The GST filing process is too complicated which the smaller business and MSME have failed to cope with. They are the probably not complying with GST and this is leading to a reduction in business and as a result on their ability to employ. The low business volume and low employment has a domino effect on consumption and growth. This cannot be corrected easily.The GST filing process needs attention. The govt is looking at it but acting slowly. Also a simplified GST process will probably still need some computer skills and online access making it a tough ask for many used to cooking the accounts using paper books. The aim of GST filing should be an app on a smart phone where invoices can be scanned uploaded and returns filed. I hope the GST council achieves this.
2. Credit availability – Banks aren’t lending due to NPA stress and now this has spilled over into NBFC inlcuding the failure of ILFS recently. Lack of credit impairs growth. The bank NPA is not a new problem but the NBFC crisis is new. The government should have acted faster on this. Bank recapitalisation has been attempted but this isn’t adequate. Privatising public sector banks with permission for foreign capital has been advocated by me earlier. This is still relevant. A low interest rate will also enhance number of people opting to obtain credit.
In effect the govt is doing something.(corporate tax cut and real estate fund) and there are things they have done but not fast enough (work in progress – simplification of GST & NPA clean up) and more things to do ( labour law reform & banking reform). The labour law reform along with new low corporate tax rates can be a real winner as it will attract foreign investment now moving away from China. Of course it will also need to improve ease in doing business.
In the near term the govt can consider a stimulus and rev the economy and this will be done at the cost of fiscal deficit. This is not an easy decision. Will an increase in spending be of long term benefit ? Will diverting the funds to rural spending -like for agriculture and MNREGA make a difference rather than spending on big infrastructure projects ? This one hopes will lead to short term gain in consumption and thereby increasing sales, yet keep the fiscal deficit under check.
My feeling is not to spend more for short term gains of growth. It is important to rein in the fiscal deficit.The aim should be to streamline GST filing and improving credit availability in the near term. Newer reforms like banking sector reforms should be pursued urgently as they will be needed for longer term growth. A proactive supportive role will help the economy recover in reasonable time.
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Thiru's Blog 