2020: An Unwelcoming Dawn¬¬¬

As we enter 2020, with the US and China striking a partial trade deal and the UK elections clearing the way for Brexit, the global economy finally heaves a sigh of relief. Amidst these emerge a ray of hope of a restart of global investment and resurgence of global trade volume. But with populist parties, nationalist leaders and inward-looking policies on the rise in many parts of the world, any hope of a sustainable growth in the global economy appears far-fetched.

The disruption likely to be caused by Artificial Intelligence and digital technology, and the accompanying loss of jobs, creation of all-together new jobs and the changes that are likely to hit almost every existing job, will be all incredible to contemplate. In short, as most experts would like us to believe, the digital transformation will result in disruption of businesses like never before.

Amidst these challenges, India has its own share of woes to deal with the  GDP growth rate having fallen below the psychological 5%-level, while private investment has gone down to 1%, private consumption growth has also halved year-on-year, manufacturing activity contracted by 1%, and unemployment rate has touched a 45-year high. But of these indicators, it is the fall in the electricity generation by 12.2% that effectively reveals how severe the slowdown is.

Apart, what is causing further anxiety is the threat of the ratio of gross Non-Performing Assets (NPAs) of banks further dipping to almost double-digit level (9.9%) during the current year, as per the latest RBI’s Financial Stability Report. This twin balance sheet problem coupled with the collapse of IL&FS, and the subsequent turbulence in the NBFC space, has dried out credit flow to businesses; as a result, growth in bank credit is expected to fall to 58-year lows in 2019-20. This stokes fear that our financial system may be plagued with debt stagnation and in a way fiscal dominance.

The only saving grace in this all-too gloomy scenario is that inflation rate still remains friendly and benign, although retail inflation rate has touched 5.54%, while food inflation has hit 10% causing anxiety to the common man. Hence, any further rise in inflation is bound to hit the apex bank's rate cutting streak of last several quarters. Although there was a rise of 6% in GST collections during November after two straight months of negative growth, no one is sure if this trend would continue. Further, the recent cut in corporate tax rates is likely to cause a severe dent in government revenues. All this is making one wonder if Arvind Subramanian, the former Chief Economic Adviser, is right in his observation that our current growth which is the lowest in the last three decades is both cyclical and structural!

The rating agencies have already pared growth estimates for the current year: IMF has cut its growth estimate for India to 6.1% from its earlier forecast of 7%, while Moody’s Investor Services too has lowered its forecast to 5.6% from its earlier announcement of 6.2%. Against this backdrop, the announcement by the government of its five-year infrastructural investment plan of 102 lakh cr with a focus on roads, housing and urban development, railways, power and irrigation is a welcome development. The plan per se is certain to revive our economy, nevertheless, the billion rupee question is: How to fund it?

And that is going to be a big challenge, particularly from fiscal discipline point of view, for a large fiscal stimulus is harmful to an economy where deficits are already large, while interest rates too are high relative to the GDP growth. Further, relying on banks exclusively for such huge investments would only worsen their asset-liability scenario and may even result in a further spike in their bad assets. So, any further fiscal expansion is imprudent. There is also a suggestion that in absence of any scope for a large stimulus, personal tax rates may be moderately cut to boost consumption and thereby create demand in the economy. This too is not a wise measure, for it only favours a small section of the society. If the desire is to boost the consumption and thereby nudge the economy to grow, it is perhaps better to put cash, by direct transfer, in the hands of rural households, which constitute the major segment of the market. Given these constraints, one has to keep his fingers crossed and see how the finance minister cracks the growth riddle.