India’s gross domestic product in the July-September quarter grew 4.5%, the slowest pace of quarterly growth since the beginning of 2013. This was the sixth consecutive quarter where the sequential growth rate was lower than the preceding one. The trend highlights the extent and duration of the loss in economic momentum. A sharp recovery from the current level is unlikely. Another data set, which captures the performance of eight core infrastructure industries, contracted by 5.8% in October. To underline, data suggests that the economic slowdown is broad and deep.
Growth rate for the July-September quarter did not come as a shock. Multiple indicators pointed to a continuation of the slowdown. Of particular concern is the pattern of growth. Manufacturing contracted by 1%. To an extent, it has been adversely affected by lacklustre global trade. But there are many constraints which are entirely domestic in nature. Performance of manufacturing is worrisome from another standpoint: options for youth to transition out of low productive farm activities are being squeezed. The economy has been propped by a surge in government spending, the only segment which witnessed double digit growth. However, a surge in government spending will not provide a durable solution.
The slowdown in aggregate demand appears to be of a structural nature. Pickup in demand through government spending will not be as durable as an increase powered by rising incomes. The government also is facing constraints. Nominal GDP growth, which is not adjusted for inflation, was 6.1% in the July-September quarter. This growth rate is significantly lower than what the government has based its budget arithmetic on. Consequently, tax revenue collection will be under pressure. In addition, companies have been offered the option of shifting to a lower corporate tax regime. Therefore, there are limits to the push which can come from government spending.
The road ahead requires structural reform of markets of factors of production such as land and labour. Increasingly, there are signs that another factor market, that for capital, needs serious reform too. The mess in the financial sector has contributed quite a bit to the slowdown. Unless there are changes here it will be difficult to harness adequate domestic saving for investments. While reforms need to be carried out simultaneously in all markets, it’s the financial market which requires prioritisation. Unless issues which have jammed the flow of credit are not addressed, recovery elsewhere will be slow.
This piece appeared as an editorial opinion in the print edition of The Times of India.
via The road ahead: Government must fix the financial sector to reverse economic decline