With the Indian economy registering a 4.5% increase in gross domestic product (GDP) in the second quarter of FY20, many economists and market watchers must have heaved a sigh of relief. After all, with critical parameters like the output of the eight core industries such as rail freight traffic, major port cargo traffic, and bank credit to industry in a free fall, they had feared the worst: growth falling to 4%. Hence, the relief—though growth is far lower than the 7% achieved in the second quarter of last year and the lowest in six years since January-March quarter of 2013.

But a deeper look at the numbers shows that the country has much to worry about. For instance, nominal GDP—real GDP plus inflation— has fallen to just 6.3%, the lowest since the new GDP series came into being. This is particularly worrisome for corporate leaders since most of their calculations, whether it is for investing, or for pricing their products, is heavily dependent on this figure.

Nominal GDP also plays an important role in ensuring the well-being and optimism of employees because it determines their increment and future salaries. A fall in nominal GDP means that companies will be most unwilling to invest because they see little opportunity to hike prices on their products and therefore garner less profits. Demand too will take a hit as individuals would rather prefer to save than spend because they see little chance of their salaries and wages going up in the near future.

Former prime minister and finance minister Manmohan Singh says the situation is “worrisome”. “This is clearly unacceptable and the aspirations of our people want that this country should grow at 8-9% per annum,” he said. “It is my belief that mere changes in economic policy will not help revive the economy. We need to change the current climate in our society from one of fear to one of confidence for our economy to start growing robustly again at 8% per annum.”

The fact that this downturn comes at a time when the manufacturing sector is already fighting hard to keep its head above water, makes the situation even worse. Data on the output of eight core industries, which the government released just before the GDP numbers, show that it has contracted by 5.8% in October, scuttling all hope of an early recovery. Electricity production contracted by 13%, coal by 17% and cement production went down by 7.7%. Even tax collection at Rs 1.32 lakh crore in this quarter was nearly Rs 1 lakh crore short from the earlier quarter. Hence, keeping the fiscal deficit in check will be a challenge.

“Bottoming-out of growth could be further down the road and recovery is unlikely to be V-shaped as consumer demand, credit supply, and risk appetite remain lacklustre,” argues Sreejith Balasubramanian, economist at IDFC Asset Management Company.

Hence, even a 5.06% increase in the private final consumption expenditure, or private investment, is happy tidings for the country, though it is much lower than the 9.85% a year ago. Like last year, the heavy lifting was done by the government in the second quarter too. The government’s final consumption expenditure was 15.64% compared to 10.9% in the same quarter of last year. The government spent nearly Rs 6.92 lakh crore in the second quarter of FY20, compared to Rs 5.82 lakh crore in Q2 of 2018-19.

And things are not going to get any easier in the near future. Indranil Pan, economist at HDFC-First Bank, says the year will end with a growth of 5.2%, while Anubhuti Sahay, economist at Standard Chartered, puts the figure at 5.3%. Again, the extended monsoon season, particularly with heavy rains in October and November, has resulted in damaged crops in several parts of India. This has led to higher prices of onion and tomatoes resulting in higher food inflation.

Higher agricultural prices works like a double-edged sword. On the one hand, it can put more money in the hands of farmers, it can also leave the Reserve Bank of India with little room for rate cuts. More so at a time when the flow of funds to the commercial sector contracted by a massive 87.6% over April to mid-September 2019 compared to the same period last year.

The cure for the current slowdown caused by cyclical and structural problems requires banks to start lending so that manufacturers and providers of service have adequate working capital. Such a move could see the economic system moving again because the earlier steps to revive the economy have not really worked in creating much-needed demand. In order to infuse greater liquidity into the system, the central bank can reduce the cash reserve ratio of banks and the statutory liquidity ratio so that banks have more money to lend and also keep the exchange rate in check.

On its part the government needs to invest more in infrastructure, make it easier for foreign direct investment to flow in, ensure better agrarian terms of trade, and urgently reform education and health to boost human productivity. Putting more money in the hands of people through a reduction in income tax or providing more money to the farmers through the Pradhan Mantri Kisan Samman Nidhi could give a much-needed boost to demand and the economy.

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