India Inc, it appears, is growing impatient with the government’s economic management. Days after Bajaj Auto Chairman Rahul Bajaj slammed the government for not doing enough to boost demand and private investment in the economy, engineering major Larsen & Toubro’s chairman A.M. Naik has warned that India would be lucky to achieve even 6.5% growth in the current fiscal year; tardy project clearances and lack of reforms have dimmed hopes. He also joined a long list of experts who have raised doubts about the credibility of the Centre’s macro data on the economy. Such plainspeak is welcome. It is a corporate chief’s duty to be frank about a company’s business prospects, especially while addressing shareholders; for a conglomerate like L&T, much depends on the state of the economy.
Many analysts believe that the Indian economy took a turn for the worse in late 2016, after the government demonetized high-value currency notes overnight, crimping demand and paralyzing much economic activity, especially in the cash-dependent informal sector. The disruption stalled a recovery from the pre-2017 phase of growth constraints imposed by a combination of over-indebtedness and sluggish investment, among other factors. The central bank’s relatively tight money policy may have also added to the woes.
While low inflation of the past few years has been attributed to sound monetary policy, it is also a reflection of a demand slump that isn’t much of a surprise, given that India’s savings rate has stayed far below its peak, private investment has failed to pick up, and public spending has been unable to stir up sufficient commercial activity. Today, it is clear that the government needs to think beyond the usual toolbox. Neither an interest rate cut nor a fiscal expansion is likely to do what’s needed. Structural drags have kept higher growth out of reach, and it is these that need to be addressed.