Government Policies and Economic Slowdown
Published: December 30, 2019
The recent revision of growth estimate by the Reserve Bank of India has brought the spotlight back on the issue of revival of growth. The GDP numbers convey serious policy implications on the fiscal front. If we look at the gap between GDP and GVA, the higher gap could mean the growth of indirect taxes with government transfers like subsidies being stagnant due to fiscal compulsions. Thereby in the context of current fiscal, it is required by the government to clear the fertiliser subsidy and unclog the system at the earliest.
GDP and GVA
A trend in the earlier years has seen the gap between GDP and GVA as high as 80 basis points, peaking in third / fourth quarter with the government trying to maintain the trade off between growth and fiscal discipline. While during this trade-off, the point we forget that only growth leads to followup with revenue targets leading to fiscal prudence. It must also be remembered that while sticking to a fiscal deficit target during the time when growth is a problem, leads to non-credible and non-transparent fiscal rules.
The Monetary policy committee’s decision to not hike rates, defines the limited role of the policy in context of the growth problem. With a quadruple problem of corporates, banks, NBFCs and households, further rate cuts will increase household leverage and might not work unless used with a counter cyclical fiscal policy.
A study by SBI in case of consumers who buy products from e-commerce sites like Flipkart and Amazon reveal, that people living in Tier 2 and Tier 3 cities with a population of less than 1 percent of Mumbai, show a demand size of 40 percent higher than that of cities like Mumbai. Hence, it could be a demand slowdown which can be attributed to consumers holding back spending due to uncertainties.
The need is to refrain from sector specific uncertainties, like in case of telecom via contradicting policies. A setback in the sector can hold back consumption every further which will negate the counter-cyclical measures undertaken for a fiscal push in the next budget. The states accounting for 16.8 of global GDP (in terms of purchasing power parity) which include Maharashtra, UP, Tamil Nadu, Karnataka, Gujarat, Rajasthan., Andhra Pradesh, Telangana, West Bengal, should continue to have a policy continuity, especially during changing political regime. Rather than looking at short term measures like farm loan waivers, the need is to undertake long term steps such as improvement of agricultural productivity.
Model Questions Category: 060 - Economic Growth Development