India is currently undergoing a slowdown in the GDP growth rate and the continued fall since the second quarter of FY17 is “technically not short-term in nature or even transient,” SBI Research has said in a report.
“While it is true that the economy has undergone too many structural breaks since November 2016, and that may have precipitated a transient slowdown, it will be unfair if we only call it transient. A slowdown in demand has only aggravated the situation,” it said hinting that the slowdown is for real. Private sector capital formation is also languishing as resolution of stressed assets is yet to happen. “This situation demands that the government steps in and uses the fiscal policy as a tool to rev up the economy,” SBI report said.
The Research note has come ten days after BJP president Amit Shah attributed the slowdown — GDP growth slid for the sixth quarter in a row to hit a three-year low at 5.7 per cent in the June quarter — to “technical reasons”.
“GDP growth, jo Atalji ke samay 8 per cent thi, 2013-14 me wo 4.7 (per cent) par aayi, aur ab usko – last quarter chod dijiye, ek technical karano se hua hai – magar last quarter chod dijiye to 7.2 per cent par usko pahuchane me safalta mili hai. (GDP growth, which was at 8 per cent during former Prime Minister Atalji’s regime, came down to 4.7 per cent in UPA regime. Now, if you leave the last quarter — when growth fell due to technical reasons — we have been successful in increasing it to 7.2 per cent),” Shah had said while addressing industrialists at a FICCI session in New Delhi on September 9.
Stating that the economy is in urgent need of a fiscal push now to shore up growth, the SBI report said: “We believe the government should consciously expand the spending and fiscal deficit, without disturbing the borrowing maths. This can be done in the following manner. First, the government being aware of the crowding out argument, has kept the net market borrowing on a declining trend over the years with Rs 3.4 lakh crore budgeted for FY18. This reduction in net borrowings has been plausible owing to buybacks and switches. The government can consider more of these buybacks and switches in next fiscal as a first option to keep net borrowings under control.”
“Second, if we look at the total borrowings which is the sum total of net market borrowings through dated securities and short term sources, it may be noted that short-term borrowings of only Rs 2002 crore were budgeted for FY18. However, we believe that short term borrowings could be increased from the current levels, as movements in short term rates depend crucially on liquidity,” it said.
Core liquidity which rose sharply post demonetisation and reached a peak of Rs 4.48 lakh crore in March 2017 is still excess, amounting to Rs 2.7 lakh crore in August 2017. “Thus increase in short-term borrowings and hence a concomitant decline in long term borrowings will definitely not lead to higher interest rates under the current circumstances. This will also keep the total borrowings in check,” SBI report said.
The government can always use the clause in Fiscal Responsibility and Budget Management (FRBM) Act that says “far-reaching structural reforms in the economy with unanticipated fiscal implications” which can provide an escape clause (or slip) for a 0.5 per cent deviation from the recommended target.
The report said the government has pegged the fiscal deficit for FY18 at 3.2 per cent of GDP and remains committed to achieving 3 per cent in the following year, but it should not get straitjacketed in the fiscal consolidation agenda so that the development goals are compromised.
Another option available for reviving growth as being made in several circles is by depreciating the currency so as to make the exports more competitive. “However, even though we believe a depreciation in exchange rate will be a welcome move as far as shoring up export competitiveness, it will militate against inflation targeting,” SBI report said.