The policy mess-up led to job losses, lower consumption and a resultant lower investment.
In the run-up to the Delhi Assembly elections in 2015, Prime Minister Narendra Modi had famously rebutted the Opposition argument that the economy was doing well because of a record low in crude oil prices by exclaiming, if he was lucky for the economy, why vote for others. But a little over a year after this triumphalist statement, the economy’s slide began — beginning with the ill-conceived demonetisation, ill-timed roll-out of the goods and services tax and the artificial suppression of rural incomes by offering a lower minimum support price for agricultural produce.
The policy mess-up led to job losses, lower consumption and a resultant lower investment. This is a vicious cycle that everyone wants to stay away from. But instead of addressing the problem head-on, the government continued to remain in denial. The downturn that had set in during 2017 is now snowballing into a major economic crisis — global rating agency Moody’s has already downgraded its outlook for India as it expects the country to witness a prolonged slowdown. A slide two notches down would put India in the junk category. And if one doesn’t like believing international agencies, the State Bank of India, too, has the most worrisome forecast: that the Indian economy would grow merely by five per cent, which would be the lowest in the last 11 years.
If one needs more evidence about the mess-up, look at the latest numbers of the Index of Industrial Production, or industrial output. In September, industrial growth was the slowest in the last eight years as it contracted by 4.3 per cent — for two straight months.
The most worrisome aspect in the industrial growth numbers is the falling investment in capital goods and the declining sales of consumer durable goods. In September, the capital goods output shrank by over 20 percentage points, which indicates that companies are not investing in adding new manufacturing lines and thereby not creating new jobs. A 56 per cent decline in the production of steel rods and bars reflects the slowing construction activity and a 46 per cent decline in commercial vehicle production tells us about the low confidence that truckers have in the economy. The fact that contraction was seen in the production of computers, electronic, optical items — products used by the country having the largest youth population — proves the secular decline in the economy. Union ministers were quick to blame Ola and Uber for declining car sales; one wonders how they will explain the shrinking sales of the ubiquitous two-wheeler, the mainstay of urban and rural India.
The economic fall could further aggravate if the government does not take immediate steps to boost consumption and increase confidence among businesses. Instead of selling land parcels that could at best attract domestic capital, the government should perhaps exit non-strategic sectors such as oil, banking, capital goods and railway freight, among others, to invest the proceeds in constructing efficient public transport and a road network. While creating jobs and boosting consumption, public transport can also reduce dependency on imported fuel. In rural areas, the government should encourage gram panchayats to create corporate entities, with all villagers being shareholders, to set up food processing units for local produce. The manufacturing of value-added products at the village level would protect villagers from the vagaries of distress sales.