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RBI governor is right — structural reform and public expenditure are key to growth

By: Editorial | Published: January 13, 2017 12:25 am

A little over two months after the government’s decision to withdraw high value notes, the economic mood appears to be sombre. That may have to do with the reinforcement of the growing belief that attempts at firing the economy are not working: Government data on GDP released last week and RBI figures on loans to the infrastructure sector put out on Tuesday and the fact that automobile sales in December was the lowest in 16 years paint a depressing picture.

The RBI data shows that loans to the infrastructure sector recorded its sharpest contraction of 6.7 per cent in November, after sliding over the first eight months of this fiscal. Credit outstanding or bank lending to the infrastructure slipped from Rs 964,800 crore in March 2016 to Rs 900,700 crore in November 2016, with the power sector, which accounts for a dominant share of credit, reporting a contraction of 10.4 per cent in November. This comes on top of the GDP data, which indicates that growth will slow to 7.1 per cent in FY 17, against the earlier projection of 7.6 per cent, and the marking down of growth estimates for this fiscal by many forecasters and agencies. RBI Governor Urjit Patel has red-flagged the central bank’s concerns on the relatively high level of borrowings of both the Central and state governments. On Wednesday, Patel warned of the dangers of a high level of government deficit in India, among the highest in the G-20 countries, which could come in the way of a sovereign rating upgrade. Patel also spoke of the need to put a lid on borrowings to ensure stable and low inflation. Adding to the gloomy vibes is a report by the State Bank of India, which says demonetisation has hit almost 70 per cent of businesses in Mumbai, Pune and nearby areas. Finance Minister Arun Jaitley has sought to dispel these impressions by showcasing the growth in both indirect (14.2 per cent) and direct tax (14.4 per cent) collections in December and in the April-to-December period to suggest that demonetisation has not hurt the economy and that reports about job losses were anecdotal.

It is hard to ignore the fact that gross fixed capital formation has fallen by 0.2 per cent this fiscal. Getting the sputtering engines of growth going and reviving the animal spirits of Indian business are going to be a challenge given the limited leeway for public spending. Patel has suggested that structural reforms and reorienting government expenditure towards public expenditure are key for durable gains on the growth front. He also hinted how easy it is to fritter away gains on macro economic stability and tough to regain them. That’s the task for the government as it gears up to present the budget in early February.


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