By Dhurjati Mukherjee
Economists are debating economic recovery, but the scenario is not all that encouraging as there are concerns about toughening conditions in the forthcoming months. There are hard realities that need to be tackled for achieving the desired growth expectations. Consumption growth has not picked up while private investment too is lagging.
Meanwhile, the already high inflation, around 7 percent in August up from 6.71 percent in July, got a fresh impetus from a sharp energy shock and rocketing food prices as a result of which real GDP grew at the same rate as that of inflation. The global situation is neither congenial with energy shocks continuing to radiate to other prices and major central banks deciding to significantly raise rates to restrain inflation. Even though it is reasoned that the Indian economy isn’t as exposed and grows on the strength of domestic demand, it cannot escape the consequences of global economic woes that still exist and also despite the country’s advantage of lesser foreign demand dependence than many other emerging market economies.
Recently, Finance Minister Nirmala Sitharaman too expressed concern about the industry holding back from investing in manufacturing, even though foreign investors are showing confidence in India. She said the Centre is willing to engage with industry and take policy action. Countries and industries abroad, she added, think India is the place to be in now and this is reflected in FDI and FPI inflows and confidence among stock market investors. “Post pandemic, India is coming up with so many out-of-the-box solutions…We are willing to have our digital platform become interoperable between countries to enable cross-border transactions”, she assured.
Delving into the matter, it can be discerned that apart from investment the trajectory of domestic demand is also not smooth. Private consumer spending, which has recovered insufficiently with significant damages at the bottom-of-the-pyramid, is likely to hurt some more by the weakening of exports, inflation and costlier funding. Indications of uneven recovery have persisted into this quarter and could extend ahead. As is generally agreed, sustained growth depends mainly on a revival of capital investment by the business sector but unfortunately while there’s improvement in health of the financial sector, investment to the growing needs is not forthcoming.
It remains to be seen if the lower income segments get back on their feet without government help. This brings into focus the role of government spending, which has been prominent in supporting the economy throughout the pandemic. In a worsened configuration, however, the capacity to expand its scope of growth support is severely circumscribed by inflation, elevated public debt and a spare fiscal situation.
Though the RBI has been monitoring monetary policy to rein in inflation, the implications are that macro-economic policies can no longer replace the private growth drivers in any significant measure. There are expectations that the bank may again hike rates by another 25 to 50 points at its next meeting. There has to be solid evidence on consumption recovery such that it draws in new investments but this is yet to be seen.
There is also a need to consider the condition of daily wagers. Some reports have indicated that labour work is scarce while wages are dropping, leading to indebtedness. It’s the combination of factors that could be contributing to the rising death of daily wagers. The recent report of the National Crime Records Bureau (NCRB) data showed that one in four suicide cases during 2021 was a daily wage earner; that is of 1.6 lakh suicide cases reported in 2021, 42,004 were those of daily wagers. The share of daily wagers dying by suicide has increased from 12 percent in 2014 to 25 percent in 2021.
Many social scientists believe that lack of jobs in the informal sector along with inadequate wages and high food inflation have affected people who have been hit the hardest. Even the building of highways and roads across the country has been hit with the pace of construction falling by 15 percent between April and July this fiscal.
As capital flows are a function of relative growth prospects and relative interest rates, if the global economy recovers and Indian economic growth also rebounds, the outflows would be more forthcoming. “Similarly, whether rising interest rates in the United States lead to outflows depends on the trajectory of Indian interest rates as well,” an economist recently pointed out. Large domestic pools of savings and capital can help offset any capital outflows.
But considering the huge requirement of resources to boost the economy at such a juncture, insufficient funds are a huge drawback. Meanwhile, Fitch Ratings slashed its India growth forecast for the current fiscal to 7 percent from 7.8 percent previously, citing elevated inflation levels and higher interest rates as it joined other agencies in reducing the forecast. It also forecast lower growth of 6.7 percent in 2023-24. However, it needs to be pointed out that both these forecasts may witness a further downtrend.
While it cannot be denied the economy is moving in the right direction, the growth momentum is lacking. This is principally due to the fact the lower segments of society, specially the economically weaker sections, do not have adequate purchasing power and food inflation has affected them badly. Only talking of the size of the economy without bothering to know the living standards of the masses has possibly no economic justification.
The thrust has to be given on job creation and a sustained manner of development. In this connection Prime Minister Modi’s focus on khadi and seeking to take it to the global market is a step in the right direction. Moreso, asBangladesh has emerged as a leading exporter of textiles when India has far more potential and expertise.
It goes without saying cottage and village industries need to be encouraged in a big way and some Indian brands popularised at both the national and international levels. A concrete plan of action with specific targets needs to be put in place. Apart from traditional exports, there is need to focus on various types of cottage industries, specially handicrafts, and promote these in a big way.
The economy has to bounce back, but it cannot be measured just by GDP growth. There has to be grass-root development, where the focus needs to be on the rural and semi-urban sectors and the people who live there and struggle for an existence. The government has to prepare an action plan for upgrading the conditions of those who work in the informal sector, attract more people to go in for self-employment, emphasise on branding and value addition and giving a thrust to exports. As is well known, there is a widening gap between exports and imports and this needs to be narrowed down.
Finally, in tackling the emerging challenges, simultaneously through enhanced government investment — even through deficit financing — the private sector should be persuaded to invest more in innovative manufacturing and exports. As rightly pointed out by the Reserve Bank of India in a recent article, “monetary policy has to perform the role of nominal anchor for the economy as it charts a new growth trajectory”. — INFA