The Indian economy was in the uptick and all was going hunky-dory, even a year ago. From the International Monetary Fund (IMF) to the Reserve Bank of India (RBI), the growth projections for the economy were all above 7%. What has gone wrong suddenly that we are struggling to clock even 6% growth in FY20? Every day, the news headlines now are about job losses in sectors as diverse as automobiles, financial services and biscuits. The reasons are an accumulation of both supply and demand issues that have been aggravated by global factors and local shocks.

Technology is evolving every day and so is the business ecosystem. Automation, robotics, 3D printing and artificial intelligence are no more making headlines only in futuristic journals and magazines. Their adoption has gone up significantly, not only in the developed world but also in India. Our general education system that is accessible to the masses is not able to train our youth beyond routine and clerical work capabilities. The routine and clerical work, which led to the BPO boom and creation of a large number of jobs in the services sector, has come under the threat of extinction. We do not need a human to check whether the ledger entries are correct, do a medical transcription, provide voice support services, etc. Assembly lines can be handled by robots better than humans. We have been talking about these threats for several years now, but it has now come to really bite us. Thus, we need radical thinking on this front and incremental changes will not work. Unfortunately, we do not have time on our side, since the demographic dividend upside for us as a country will close in 15-20 years.

On the spending and savings habit, we all know that the household savings rate has come down from over 23.5% in 2010-11 to just above 17% in 2017-18 and, possibly, further lower by now. Banks were struggling with non-performing assets and industry demand for credit was low. This led to pushing of personal loans that clocked around 15% annual growth rate over 2015-2019. Private consumption’s share in gross domestic product (GDP) grew to over 55%, driven by the rising middle class population and easy credit. These factors contributed to the lower household savings rate.

Impact was felt on growth rates that were already sliding in FY17 and FY18 due to disruptions caused by demonetisation and the introduction of goods and services tax (GST). In addition, we had the Insolvency and Bankruptcy Code (IBC) kicking in, which led to corporates looking at deleveraging balance sheets rather than looking to borrow for capital investments. The micro, small and medium enterprises (MSME) sector, especially in the unorganized sector, which provides employment to almost 40% of the workforce, also reeled under the GST shocks, contributing to the downward cycle. The trade wars, slowdown in Europe and impending recession fears in the US have further added to the gloom.

The finance minister has announced several measures to ease working capital and credit availability to MSMEs. The market sentiment busting super-rich capital gains tax has been withdrawn. Measures to boost credit demand for housing and automobile sectors have also been announced. While these measures will certainly help, we need the booster dose of investments by the government first as a spark plug for reigniting the economic engine. Private investment and demand pick-up is going to be an uphill task without a fiscal pill. A slight slippage on the fiscal front in the immediate term towards capital investments must be given serious consideration.

Ranen Banerjee is leader–public finance and economics at PwC India.

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