In recent weeks, the National Democratic Alliance government headed by Narendra Modi has revived the Economic Advisory Council (EAC) to the Prime Minister (under economist Bibek Debroy), formed an expert panel on agriculture under federal policy think tank Niti Aayog, and extended the term of chief economic advisor Arvind Subramanian.
The appointments come at a time economic growth has slowed down to 5.7% in the April-June period of 2017-18 from 6.1% in the preceding three months.
Weak global oil prices, and the decision to not pass on the benefits of these to the consumer but instead increase taxes on fuel and use the revenue to manage the deficit, has stabilised India’s macro-economy. The Reserve Bank of India’s conservative approach to lending rates has also helped. But two shocks to the system, in the form of demonetisation and the implementation of the goods and services tax (GST) (however temporary their impact), and the collapse of Indian exports (one of the big economic drivers even a few years ago) have taken their toll on the economy.
To make things worse, India’s agriculture sector may be going through a deflationary period.
In the absence of private investment—over-capacity, and the so-called twin balance sheet problem (debt on the books of companies and bad loans on those of banks) have affected it—it is government spending that has emerged as the big driver.
The recent appointments indicate that the government is looking for stronger measures to boost growth even as the temporary aftershocks of last November’s demonetization and the destocking of goods ahead of transition to GST in July wears off. Restocking of goods after GST implementation and the good monsoon are expected to aid the pick up in growth in coming quarters. Growth in sectors such as fertilizers and steel are already picking up, said an industry analyst who did not wish to be named.
A finance ministry official, who spoke on condition of anonymity, said that a pick up in global economic growth in coming quarters may aid the recovery of the manufacturing sector in the country, but reviving lost momentum will need strong measures.
According to N. R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, a think tank, reconstituting the EAC to the Prime Minister is a welcome step that will help the government assess and understand macroeconomic issues from a broad perspective.
“One step that urgently needs to be done is to track the pattern and quality of spending of the funds transferred to states and to local bodies from the divisible pool of taxes as per the 14th Finance Commission recommendations,” said Bhanumurthy. Properly utilized, these funds could spur consumption and stimulate investments.
One bold step taken in recent months by banks to deal with the bad debts that are crippling their ability to lend is to pursue bankruptcy resolution of large corporate defaulters at the National Company Law Tribunal. The move is expected to help in turning around viable companies while unviable ones could be liquidated to redeploy capital in the economy.