The Reserve Bank of India (RBI) has suggested that the recent deceleration in the economy could be in the nature of a soft patch mutating into a “cyclical downswing”, rather than a “deep structural slowdown”, even as it proposed several measures, including improving ease of doing business, reforms in factors of production and faster implementation of capital expenditure to revive the animal spirits of the economy.
The RBI, in its Annual Report for 2018-19 released on Thursday, said its disaggregated analysis confirms that a broad-based cyclical downturn is underway in several sectors — manufacturing, trade, hotels, transport, communication and broadcasting, construction and agriculture. The government which had come out with several measures last week to tackle the downswing has promised more steps in the coming weeks.
India’s real GDP growth which clocked an average of 7.7 per cent during 2014-18 and 8 per cent in the first quarter of 2018-19, began to shed momentum through the rest of 2018-19. The growth slid down to a five-year low of 5.8 per cent in the March quarter of 2018-19. The loss of speed became evident from second quarter as some drivers of growth — notably investment — began to fade, albeit cushioned by still resilient consumption spending. Several sectors, including auto and consumer goods, have witnessed demand slowdown, production cuts and lay-offs.
According to the RBI, it’s important to note that trend growth has witnessed slight moderation since 2016-17, contributed mainly by the services sector, especially trade, hotels, transport, communication and broadcasting, and financial, real estate and professional services. “Issues and challenges in these sectors need to be addressed for achieving broad-based upturn,” it said.
“What ails the animal spirits? At the core is the issue of domestic demand,” the central bank said. And what should be the policy focus? Continuing focus on improving ease of doing business; reforms in factors of production, viz., land and labour, capitalising on opportunities opened up by the heightened trade tensions and faster implementation of capital expenditures by public authorities and similar other measures have the potential to inject growth impulses into the economy, it said.
There are still structural issues in land, labour, agricultural marketing and the like, “which need to be addressed”. “These stylised facts and empirical findings conditioned the setting of monetary and fiscal policies during 2018-19. They warrant a careful evaluation, at least from the point of view of ascertaining the headroom available for counter-cyclical policy responses, if the slowdown gets prolonged,” the RBI said. It noted that the space available for delivering a fiscal stimulus to the economy, if warranted, is constrained.
Consumption demand, private investment revival highest priority
Disaggregated analysis by the RBI has confirmed that a broad-based cyclical downturn is underway in several sectors — manufacturing, trade, hotels, transport, communication and broadcasting, construction and agriculture. It acknowledged that revival of consumption demand and private investment has assumed the highest priority for the government and the central bank.
Through the second half of the year, high frequency indicators have flashed slowing sales growth among manufacturing and non-IT services sector corporations, with evidence of private consumption losing pace, especially in the FMCG segment. Financial conditions eased, but bank credit is yet to become broad-based and flow of resources from nonbank financial intermediaries has not yet gained its earlier traction.
“The key question that confronts the Indian economy as it looks ahead to the rest of 2019-20 is: are we dealing with a soft patch, or a cyclical downswing, or a structural slowdown?” the RBI Annual Report asked. “This will determine the policy responses – illustratively, a soft patch can be looked through, while a cyclical downswing will warrant counter-cyclical actions in terms of monetary and fiscal policies, but a structural slowdown will need deep-seated reforms,” it said.
The diagnosis is difficult; these conditions are hard to disentangle cleanly, at least in the formative state. Proximate answers could perhaps be found in the lessons of the experience of 2018-19, with which it could be feasible to assess the outlook for 2019-20, it said.