Good news about the economy is rare. It is mostly bad news, which is getting worse. Growth in gross domestic product (GDP) has declined for six consecutive quarters. It plummeted to a low of 4.5% during July-September 2019, the lowest in 26 quarters since March 2013. There is a sharp slowdown across sectors. Compared with July-September 2018, growth dropped from 4.9% to 2.1% in agriculture, from 8.7% to 3.6% in utilities, from 8.5% to 3.3% in construction, and from 6.9% to -1% in manufacturing. Growth also declined significantly, though not as sharply, in services. In the core sectors of coal, crude oil, natural gas, petroleum products, fertilizers, steel, cement, and electricity, which account for 40% of industrial production, growth plunged from 5.4% to -0.8%. The consequences on the demand side are no surprise. Growth in private final consumption expenditure, in real terms, fell from 9.8% to 5.1%.

Alas, the bad news extends much beyond these dismal statistics. The unemployment rate, always high among the educated, is much higher, while the poor in rural India are experiencing diminishing employment opportunities and stagnant real wages. The financial sector is a mess. The amount of bad loans is huge. Banks are reluctant to lend for fear of default. Investor sentiment and business confidence have sunk to a low. The government may have accentuated the problem. The fear of harassment by tax authorities and enforcement agencies, through often arbitrary and selective actions, has intimidated businesses. There is a policy paralysis. Civil servants seem not to have the courage to speak the truth to those in power.

The government appears in denial mode. The finance minister says that the economy is not yet in a recession. Spokespersons never tire of stating that the fundamentals of the economy are strong and a revival in growth is around the corner. An ostrich can bury its head in the sand, but governments simply cannot. The quiet crisis, which has been mounting for some time, is visible and could soon be audible. Indeed, the state of the economy, which has begun to hurt and will inevitably impose a disproportionate burden on the poor, is bound to have political consequences.

The origins of the problem go back in time. The economic slowdown, which surfaced in 2011-12 to gather momentum in 2016-17, was ignored rather than being addressed by successive governments that hoped it would go away.

The enormous opportunity created by the sharp drop in world oil prices in 2014, followed by a downturn in world commodity prices, was entirely lost by the high interest rates that strangled investment and the strong exchange rate that stifled exports. Obsessive concerns about the fiscal deficit meant that counter-cyclical macroeconomic policies to stimulate consumption and investment were ruled out.

The persistent slowdown was exacerbated further by two shocks that the economy was subjected to. Demonetization in November 2016 dealt a severe blow to rural India, the informal sector, construction activities, and small businesses, with negative consequences for output and employment that persisted in the medium-term. The goods and services tax (GST), a good idea but introduced hastily in July 2017, was flawed in conception with its multiplicity of rates and poor design made up of complex procedures. The preparation was grossly inadequate in the government for implementation and in the economy for compliance. This dampened economic activity. The consequent shortfall in revenues was inevitable.

Attempts to revive growth from the supply-side are concentrated in physical infrastructure. The proposed investment falls far short of our needs. Government expenditure (Centre plus states) on education and health as a proportion of GDP is almost the same as it was a decade earlier and is woefully inadequate. However, public provision of education and healthcare is essential, not only for the well-being of people, but also for sustaining economic growth, a fact that is just not recognized. This needs correction here and now, even if the benefits accrue with a time lag.

In the short run, the only path to reviving growth lies on the demand side. In any economy, there are four components of aggregate demand: private consumption expenditure, private investment, net exports, and government expenditure (on consumption plus investment). Private consumption expenditure is based on incomes, which in turn depend on growth. Under normal circumstances, private investment depends on the expected rate of return as compared to the interest rate, but in a situation where there is uncertainty and fear, the restoration of investor confidence is imperative. The needed correctives require the government to act. For any given level of imports, net exports are determined by the quantum of exports of goods and services. Our export performance is poor. The value of total exports at current prices has stagnated in the range of $300 billion for the past six years, while the share of exports in GDP has dropped from 17% to 12%. The government needs to act on the exchange rate and infrastructure constraints or procedural complexities that dampen exports.

Stepping up government expenditure on consumption and investment is the only answer. Its multiplier effects on private consumption and stimulus to private investment will revive economic growth from the demand side. Fiscal loosening, through rural employment guarantee expenditure (NREGA), Mudra disbursements or GST rate cuts are all possibilities at a time when inflation is low.

The risk of doing nothing is secular stagnation, from which it is always difficult to extricate an economy. Hope has already turned into concern laced with fear. It could lurch into despair.

Deepak Nayyar is emeritus professor of economics, Jawaharlal Nehru University

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