The release of second quarter GDP data and the subsequent revision by the Reserve Bank of India (RBI) of its own growth estimate for the year has brought the spotlight firmly back on the issue of reviving growth. Even as the government and the RBI collectively battle the slowdown, its extent has left most of us befuddled. The question, therefore, is: Is a turnaround in sight?
First, the world has fundamentally changed since the onset of the global financial crisis. India and China accounted for 19.1 per cent of world GDP in 2018, as against 9.1 per cent in 2008. India’s GDP has jumped 2.3 times, while that of China jumped 3 times since then. Over the same period, while India’s per capita GDP has increased by 102 per cent, that of China’s has grown by an even sharper 182 per cent. Clearly, while we have done well, we could have done even better if we take China as the benchmark. But, what is more important is that as a nation, our aspirations have increased manifold.
The GDP numbers convey a serious policy predicament on the fiscal front. Take, for instance, the gap between gross domestic product (GDP) and gross value added (GVA), which reflects indirect taxes, net of subsides. A higher gap (higher GDP and lower GVA) could simply mean that while indirect taxes are growing, government transfer payments like subsidies have been stagnant because of fiscal compulsions. In the context of the current fiscal, it is imperative that the government clears the fertiliser subsidy at the earliest so that the system is unclogged.
This has been the trend in earlier years as well when the gap between GDP and GVA has been as high as 80 basis points on some occasions, peaking in the third or fourth quarter as the government tried to maintain the delicate trade-off between fiscal discipline and growth. During such apparent trade-offs, the point we conveniently forget is that it is only growth that leads to adherence of revenue targets, and hence fiscal prudence. Fiscal policy in India has often been painted as the mother of all villains (populist dole-outs like loan waivers have not helped either) and the obsession of the markets with a 3 per cent deficit target has led to unrealistic, unjustified and irrational exuberance in the debt markets.
Interestingly, we must remember that contrary to popular perception, rating agencies are concerned about growth and the recent S&P episode only underlines this. Thus, we must chase growth and strictly avoid using fiscal policy targets to satisfy bond market traders. Further, by repeatedly emphasising that we will stick to the mandated fiscal deficit target during a year when growth poses a serious challenge, it makes one prone to non-transparent and non-credible fiscal rules that markets will not believe in.
Second, the Monetary Policy Committee’s decision not to hike rates, though surprising, clearly defines the limited role of monetary policy in the context of the current growth conundrum. It needs to be reemphasised that when we are facing a quadruple balance sheet problem (corporates, banks, NBFCs and households), rate cuts will only increase household leverage and in such a scenario, they might not work unless accompanied by counter-cyclical fiscal policy measures.
Now, coming back to the question that we asked at the beginning of this piece, let me present some interesting facts.
Take the case of the growth challenges that the auto industry is facing in India. Strangely, it seems that the auto industry globally is facing a structural dilemma. Even though sales have been falling across almost all emerging and developed economies, the SUV segment has belied all doomsday predictions and continues to expand. India has been no exception. Our in-house study, based on a stratified sample of the SBI portfolio, reveals that car sales are income agnostic across regions, age and gender, as more and more car buyers, in every population group, are showing a preference for high-end cars. This finding provides food for thought for car makers looking to adjust to changing demand preferences.
In a related study, our customer behavioural analysis of a large portfolio of individuals, who used SBI cards to buy online products from Flipkart and Amazon, during the festive season, reveals an even more interesting trend. We observe a significant latent demand among consumers. The median spends of people in tier II and tier III cities, spread across states like West Bengal, Punjab, Andhra Pradesh, that have a population size of not even 1 per cent of Mumbai, were close to 40 per cent higher than that of Mumbai and other metro cities. Thus, the current slowdown in demand could be largely attributed to consumers holding back spending because of uncertainties.
Since we have talked about uncertainties, we must also emphasise how to remove them. First, we must refrain from creating sector-specific uncertainties in areas like telecom through contradictory policy statements. Any potential setback in the telecom sector could hold back consumption spending further. This will negate any impact of a counter-cyclical fiscal push in the forthcoming budget.
Second, the states of Maharashtra, Uttar Pradesh, Tamil Nadu, Karnataka, Gujarat, Rajasthan, West Bengal, Madhya Pradesh, Andhra Pradesh and Telangana together account for around 16.8 per cent of the global GDP (in purchasing power parity terms). We strongly recommend that these states maintain policy continuity, especially when the political regime changes. For example, rather than opting for measures like farm loan waivers, which lead to problems of moral hazard that impact credit culture, measures should be undertaken to improve agricultural productivity. Alternatively, can we not enact a law to preserve policy continuity?
This article first appeared in the print edition on December 26, 2019 under the title “For people to spend more”. The author is Group Chief Economic Advisor, State Bank of India. Views are personal.
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