Home / News / India /  The three challenges facing Nirmala Sitharaman

NEW DELHI : The slowdown in the Indian economy appears to have worsened, according to the latest reading from Mint’s Macro Tracker, launched in October last year to provide a state-of-the-economy report each month based on trends across 16 high-frequency economic indicators.

The Mint Macro Tracker shows that out of the 16 macroeconomic indicators, as many as ten were in the red (below the five-year average trend) in May, while only five were in the green (above the five-year average trend). This reading is significantly worse than what it was even six months ago, the data shows.

When India’s new finance minister, Nirmala Sitharaman presents her maiden budget on 5 July, the slowdown in the economy will be the first and foremost challenge that she will have to address.

The slowdown challenge

Addressing this challenge is easier said than done given the strain on public finances and the limited fiscal space for a big stimulus package at this point. The slowdown in the economy is most severe in the consumer-facing sectors (with all consumer economy indicators in the red) but has also affected the industrial sector, as aggregate demand in the economy has slowed down. Price signals (inflation and wage data) reinforce this picture of a slowing economy.

At a time when global demand is expected to remain weak and private investments continue to remain anaemic, the burden of reviving India’s growth engines lies with the government. The trillion dollar question ahead of the budget is the extent to which the fiscal purse strings will be loosened to boost the economy.

The credibility challenge

The next big challenge for Sitharaman will be to restore the credibility and sanctity of the budget numbers. As these pages have pointed out earlier, India’s reported fiscal consolidation over the past few years hide heavy-duty off-budget financing by the Union government to keep the reported fiscal deficit number look good.

This has strained the credibility of India’s fiscal metrics, and made analysts wary of below-the-line borrowing by the government. The government’s accounting methods have also come under fire from the Comptroller and Auditor General of India (CAG).

This issue also figured in the deliberations of the last monetary policy committee (MPC) meeting of the Reserve Bank of India (RBI) held in the first week of June, the minutes of the meeting show. Both Chetan Ghate (independent MPC member) and Viral Acharya (the former RBI deputy governor) raised concerns about burgeoning public borrowing and how this was not properly accounted for in the budget.

“Fiscal ‘prestidigitation’ or sleight of hand may contribute to our own version of a “doom-loop", i.e., by pushing expenditure off budget to meet deficit targets and then recourse to borrowing from the national small savings fund by state entities keeps administrative interest rates high to incentivise such savings," said Ghate, according to the minutes. “This impedes monetary transmission. Poor monetary transmission requires more active fiscal policy to compensate which breaches fiscal targets once again."

Acharya pointed out that when public sector borrowing requirements are taken into account, India’s consolidated fiscal deficit (between 8 to 9 percent of GDP, according to him) has reached levels similar to the ‘taper tantrum’ of 2013. In the event of another such global shock, India could be hit badly once again, Acharya warned.

The best insurance against such a shock is proactive disclosure. By reporting all borrowing items transparently, the finance ministry may well end up revising the fiscal deficit number upwards. But it is better to do so now when fund flows favour India than when India is hit by outflows.

The statistical challenge

Given that the official gross domestic product (GDP) numbers act as the universal denominator for all fiscal-related metrics and projections, and so much of decision-making --- by policymakers, investors, and multilateral institutions --- depend on them, it is important to produce reliable GDP numbers. For policymaking to be effective, it is also important that real-time GDP numbers (advance estimates) provide a reliable idea of the state of the economy.

India’s GDP data has increasingly been facing questions from independent economists and analysts on both accuracy and timeliness, as an earlier Plain Facts column had pointed out.

The ‘revised’ estimates of the former chief economic adviser to the finance ministry, Arvind Subramanian may or may not be closer to reality. But the very fact that a top economic adviser had to design economic policies without the aid of an accurate barometer of the economy that he could trust is telling.

For economic policies to be based on evidence, and for those policies to enjoy support from stakeholders in the economy, it is imperative to restore the credibility of the GDP numbers.

“Instead of arguing about it (the GDP numbers), it is far easier and more effective (lasting effect) to make available the CSO data and methodology to independent statisticians for verification," wrote the economist V Anantha Nageswaran in Mint recently. “Only then will the controversy end."

Sitharaman can do her bit by asking officials of the ministry of corporate affairs (MCA) which she heads, to put up the MCA-21 data in the public domain in a machine-readable form so that independent researchers can examine the data.

That itself will go a long way in building confidence about the new GDP series --- which relies heavily on the MCA-21 database --- and help point to improvements that may be needed in the way this database is used for GDP estimation. This would help boost investor confidence in the ‘India growth story’ and allay fears that India may be mimicking China and ‘fudging’ numbers.

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