t is a matter of relief that the Prime Minister’s newly constituted Economic Advisory Council has not, in its first meeting, discovered a magical formula that would revive flagging economic momentum. The economists of the group have identified some themes that they would work on and probably crystallise into policy prescriptions by their next meeting. As of now, they offer clarity on two points: one, there is a problem at hand, and two, raising the fiscal deficit is not the way to tackle it.
The economy’s slowdown started well before the shock of demonetisation in the third quarter of 2016-17. The poor management of the transition to goods and services tax (GST), complete with total lack of clarity on how to deal with stocks carried over from the pre-GST regime in the GST era, leading to forestalling of fresh orders and running down of inventories in the first quarter of 2017-18, has been compounded by the complexity of GST. There are far too many and too high rates, leading to classification problems. The small and medium segment of industry has been left unprepared for the procedural complexity of the new tax. But these are transition problems.
The GST Council has shown admirable willingness to sort out problems and move on. GST is a reform the economy badly needs, and will lay the foundation for sustained growth, once the teething problems are sorted out. But this would still leave unattended the problems that had led to slowdown even prior to GST and demonetisation. This calls for more fundamental changes, to address the rot in the culture of banking that has piled up bad debt, the rot in the power sector that sees 29 per cent of the power that is generated not being paid for, dysfunctional markets for land and labour and a seeming incapacity of growth to produce jobs.
That the International Monetary Fund sees slowdown in India is no big deal. The country’s young population and growing combination of digital technologies with communications, finance, healthcare, education and even farming hold out great promise. This cannot be lost sight of, while engaging with the current slowdown.