Revival of the Economy

It all began in January 2018 when the Infrastructure, Leasing and Financial Services (IL&FS) crisis broke out in the news. Several market veterans and economists were worried whether history was about to repeat itself like the 2008 Lehman crisis. With the company defaulting its payment obligations repeatedly which sparked panic among investors, received a downgrade by credit rating agencies and is a catastrophe which inflicted its wounds on the macroeconomic structure of India.

Gradually, with the job crisis mounting and the unemployment rate hitting a 45 year high. Concerns were brewing about a possible economic breakdown. Many attributed this to the rollout of GST in 2017 which did pose the companies and MSME with some teething challenges. However, the nail in the coffin was when automobile sales declined drastically. Many economists and companies believed that this is the tip of the iceberg since the automobile sector is considered to be one of the biggest parameters which determine the growth story of any country.

Andrew Tilton, Chief Asia Pacific Economist at Goldman Sachs shares his insights in a report stating that this slowdown is likely to last for a few more quarters. The macroeconomic picture worldwide is weak with a negative fiscal impulse, weakness in consumption indicators ie low demand and the cash crunch in the Non-Banking Financial Companies(NBFCs)

Recently a piece of news surfaced that Parle-G is most likely to fire 10,000 employees owing to lower demand and frequently changing production costs. Although Mayank Shah, Senior Category Head rebuffed these rumors, he claimed that if the government does not axe the tax on biscuits which currently stands at 18%, then job crisis is going to further deteriorate.

There have been multiple indicators of this slowdown, one of them being the Gross Domestic Product(GDP) numbers which are at 5%, the lowest in five quarters. The real estate sector isn’t performing well either. There are about 13 lakh houses that are waiting to be sold. Even the trade scenario is in bad shape. Exports in the last quarter stood at 0.34% and imports were at 0.45%. Almost every other day I see news flashing on my screen with the downward index beside the rupee, which is quite clear how our trade situation is staring down the abyss. Agrarian economy is perhaps at its weakest point with the monsoons going off track and the farm-related activities being affected deeply.

Even the Government’s hands are tied, as many sectors are demanding relief in taxation policies. Now, it’s all a vicious cycle- if the tax rates fall, the tax base falls which escalates the fiscal deficit thereby increasing the borrowing of the government and hence increasing the inflation rates. That as well is not a good sign for the revival of the economy.

The economy can be revived by different means, foremost being the improvement of consumption patterns. Domestic demand should have more emphasis which will immediately recover the microeconomic structure. Secondly, the government should leave no stone unturned to incentivize the foreign investors who in turn will bring the inflow of foreign currency. This foreign Direct Investment(FDI) will be used productively in infrastructure, processing, manufacturing, agriculture, power, road building will pave way for development to usher in. Public sector companies which incur huge loses should be put up for disinvestment since they are dead assets for the economy. The private sector should be given more autonomy and entry into different sectors. Our Prime Minister- Mr.Modi has been pitching for Make in India since he inherited this post in 2014. Thus the government and industries should put their best foot forward to make India the hub for manufacturing. Other few aspects that the government can try to implement is monetizing the non-performing assets, because if they aren’t used then it’s a national loss for the economy. Recapitalization of banks is a way out. The recent mergers announced by the finance minister of different Public Sector banks is a step in the right direction, with more money being pumped into the system. Ever since the new tax regime has been executed, many in the corporate world have been demanding for the demystification of the system. So a ‘good and simple tax’ should not only be talked about but also applied. 

On an ending note, there are umpteen solutions to reduce the magnanimity of the catastrophe that we are currently facing. Only with the will power of both the government and the corporate sector we can steer the wheel towards the $5 trillion economy that our Prime Minister has been talking about.