New Delhi: Martin Wolf, chief economics commentator of the Financial Times, said in an interview in January that Narendra Modi’s second term, if he returned power, is unlikely to be more reformist than the first. “In my experience, governments are less radical in the second term than in the first term. My assumption is another term for this government would not be one of radical reform," he said.

However, expectations on economic reforms have risen significantly after Modi returned to power with a mandate even bigger than in 2014.

The first challenge for the government, of course, will be to arrest the slowdown and revive the economy, through a combination of short and medium-to-long-term measures.

India’s economy grew at the slowest pace in five quarters at 6.6% in the three months ended December, prompting the statistics department to trim its 2018-19 forecast from the 7.2% previously forecast to 7% in February. The first set of macro data the new government will have to deal with is the fourth-quarter GDP data (to be announced on 31 May) that may further decelerate to 6.4% or even lower.

With annual economic growth already at a three-year low, many economists believe the slowdown in economic growth is structural which predates demonetization and goods and services tax (GST), rather than cyclical.

Sunil Kumar Sinha, principal economist at India Ratings, said while cyclical challenges can be addressed through short-term measures, the need of the hour is to address the structural challenges plaguing the Indian economy.

Rathin Roy, director at the National Institute of Public Finance and Policy (NIPFP) and member of Prime Minister’s Economic Advisory Council, is one of the many economists who believe the current economic slowdown is structural, which needs India to change its economic strategy to deal with the situation. In an interview in April, Roy said India needs to change the engine of growth which so far has produced for the top 100 million to producing goods for the masses which is more labour intensive and create more jobs.

However, the government must hit the ground running as it needs to address the slowdown in economic activities evident from most high-frequency indicators. India’s factory output entered negative territory in March after a gap of 21 months, contracting 0.1%. In April, manufacturing and services PMI at 51.6 and 51, expanded at their slowest pace since August and September 2018, respectively. The capital goods segment of IIP, which signals investment demand in the economy, also contracted for the third consecutive month in April.

While weak private investment due to over-leveraged private companies is known to have contributed to the current slowdown, consumption which has been the only engine so far keeping the economy afloat has started waning. Recent macro indicators such as vehicle sales and air passenger growth also point towards a slowdown in consumer spending. Sales of automobiles across segments in India fell 16% in April to touch the lowest in eight years, while domestic air travel in April contracted 4.5% for the first time in nearly five years.

The government in its full budget, which is likely to be presented in July, will be tempted to breach fiscal discipline and go for a demand stimulus. However, there is limited space for manoeuvring as direct tax collections in 2018-19 fell short by 82,000 crore with lower corporate tax collections while the anticipated shortfall in indirect taxes, including GST, is estimated to be close to 15,000 crore which is likely to have pushed up fiscal deficit well above 3.4% of GDP in revised estimates. At best, the government is expected to frontload capital expenditure by loosening the purse string as government spending has slowed down due to the long electoral process.

Setting the agenda for the next government, the International Monetary Fund (IMF) in April said continued implementation of structural and financial sector reforms with efforts to reduce public debt remain essential to secure the Indian economy’s growth prospects. “In the near term, continued fiscal consolidation is needed to bring down India’s elevated public debt. This should be supported by strengthening GST compliance and further reducing subsidies," IMF said in its World Economic Outlook in which it reduced India’s growth forecast by 20 basis points to 7.3% in 2019-20.

One windfall gain that the government will be hoping for is the transfer of excess capital reserve with the central bank. The Bimal Jalan-led committee set up to decide the optimum level of reserves for the Reserve Bank of India is expected to soon announce a framework. Gautam Chhaochharia, head of India research at UBS AG, said the market’s expectations of the quantum are in a range of 2-3 trillion. “The political economy’s call and trade-offs with macro stability risks (potential inflationary pressure) may also determine how this amount is likely to be disbursed (staggered or immediate) and spent (recapitalizing financial system, a direct fiscal boost towards infra, GST rate cuts to stimulate consumption or even more rural schemes). In our base case, the disbursement is likely to be staggered instead of a bullet payment, while in spending, the priority may be a mix of various objectives with a bias towards recapitalization of PSU banks," he said in a note published last week.

Rural demand has been a weak point for the economy due to sharp drop in farm prices. Recent data from Hindustan Unilever Ltd which is considered the bellwether for India’s fast-moving consumer goods (FMCG) market showed its volume growth dropped to 7% against double-digit growth in several quarters. While the government would hope the PM-Kisan scheme—through annual handouts of 6,000 for 20 million households—will somewhat arrest the demand slowdown, this may prove to be insufficient. However, the government seems to be aware of the challenge ahead and more measures to address rural distress may be taken in the upcoming budget. In an interview, chief economic adviser in the finance ministry Krishnamurthy Subramanian said: “We have to focus on extending markets to the farmers, for example, by strengthening eNAM (electronic national agriculture market). Right now, there are a lot of fragmentations in the agricultural markets."

While Subramanian sees the government pushing reforms in land, labour and capital, signalling changes in the land acquisition Act and stringent labour laws, a lack of majority of the ruling National Democratic Alliance (NDA) in Rajya Sabha may push down such reforms in the government’s priority list. The NDA is expected to get a majority in the Upper House only by end-2021.

“We expect only marginal cyclical improvement in growth in FY20 amid easier monetary stance and some consumption led fiscal push in early FY20. But we see domestic structural overhang and global slowdown concerns constraining a significant pick-up in growth. However, some pick-up in private investment may happen with policy and political certainty," said Madhavi Arora, an economist at Edelweiss Securities.

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