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Prime Minister Narendra Modi gestures towards his supporters after the election results at Bharatiya Janata Party (BJP) headquarter in New Delhi. (Reuters )
Prime Minister Narendra Modi gestures towards his supporters after the election results at Bharatiya Janata Party (BJP) headquarter in New Delhi. (Reuters )

Fixing the economy should be the priority for the new government

  • The economic growth rate has steadily slowed from a peak of 8.3% in the last quarter of fiscal year 2018 to 6.6% in the third quarter of fiscal year (FY) 2019
  • This has implications for the jobs and incomes of 250 million households

NEW DELHI : Once the rhetoric around the bitterly contested national elections dies down, the new government in New Delhi will have a complex task to handle on a priority—fixing the economy.

Although the Narendra Modi government reformed indirect taxes, brought in a new bankruptcy code and demonetized high value currencies to stamp out corruption, Asia’s third-largest economy is now slowing down.

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The economic growth rate has steadily slowed from a peak of 8.3% in the last quarter of fiscal year 2018 to 6.6% in the third quarter of fiscal year (FY) 2019, shows official data.

This has implications for the jobs and incomes of 250 million households.

The Bharatiya Janata Party, which came to power in 2014 promising “sab ka saath sab ka vikas" or prosperity for all, will have to utilize its second term to take this agenda forward, although the 2019 election campaign was more narrowly focused on national security.

Experts said there are two immediate challenges for policymakers. “Agrarian distress and unemployment have to take precedence. How one fixes it will depend on the diagnosis," said Pronab Sen, former chief statistician of India. “The symptoms are known—falling farm prices and falling employment. At the end of the day, the policy steps needed will depend on the diagnosis."

India’s economy is now battling a slowdown in factory output and consumption. Industrial output contracted 0.1% in March from a year ago, its worst performance in 21 months, as sales of cars and two-wheelers took a beating. The unmistakable signs of a broad-based demand slowdown should be addressed without delay, said experts.

“The immediate task before the new government is to stimulate demand in the economy and uplift investment sentiments," said D.K. Srivastava, chief policy advisor at EY India. Lower cost of funds could help, too. “Two successive policy rate reductions of 25 basis points (bps) each have not yielded tangible results as yet. One more repo rate reduction of 25bps may be considered. This should be supplemented by a fiscal stimulus," said Srivastava, adding that the next government should front-load spending in the current fiscal and come up with a clear fiscal and growth strategy in the full budget for FY20, which is expected in July. Repo rate is the rate at which the central bank lends to commercial banks.

To boost exports that will spur manufacturing, the domestic currency may need to depreciate substantially to at least 72 against the dollar, if not 73, according to Sen. The rupee closed trading at the interbank foreign exchange market on Wednesday at 69.66 against the greenback, 6 paise firmer than its previous close, news agency PTI reported.

One segment of the industry that suffered from demonetization was the small and medium enterprises sector. To create more jobs and revive small businesses, the country would need a holistic approach, said Sen. He added that improving their access to funds was only one part of resolving the problem. There should be a systemic fix to boost manufacturing activities by the micro, small and medium enterprises, he said.

The liquidity crunch that the non-banking finance sector is facing is another key challenge that the new government has to address. The fund crunch has hurt housing finance.

The new government also has to rework the revenue and expenditure estimates for the current fiscal that were earlier presented in the interim budget in February, taking into account emerging revenue trends, especially the below-target direct tax receipts.

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