New govt faces challenges of arresting slowdown, creating jobs: Economists

Economic growth slipped to a five-quarter low of 6.6 per cent in October-December 2018.

New Delhi: After a landslide victory at the general election, Prime Minister Narendra Modi faces immediate challenge of arresting a slowdown in the world's sixth largest economy, creating jobs, stimulating private investment and tackling bad loan woes of banks, economists have said.

BJP has won more than 300 seats in the latest polls, bettering its performance in 2014. But the victory has come amid agrarian distress, youth unemployment, anemic growth and troubles in the financial system.

Economists said the new government should ease land acquisition rules for companies, initiate labour reforms, address the funding crisis in shadow lending sector and fix mounting bad loan problem in the banking system.

Other challenges on the economic front before the new government would be to contain current account deficit (CAD), and take steps to improve the quality of manpower to make them employable.

S&P Global Ratings Chief Economist Asia-Pacific Shaun Roache said the immediate challenge is to unlock the benefits of the impressive reforms the government has already undertaken, especially the GST and Insolvency and Bankruptcy Code which are needed to be streamlined further to reap benefits.

"Second, decisive measures to resolve asset-quality issues at public banks, improve their operational efficiency, and resolve the stress in the non-bank finance sector would be a large step.

"These would improve credit conditions and access to finance for the private sector, necessary conditions for the stronger private investment needed to lift growth," Roache added.

India Ratings and Research Chief Economist Devendra Pant said the new government has the challenge to arrest a slowdown in growth and focus on creating non-inflationary long term growth. "Any short term growth measure might prove inflationary," he added.

Economic growth slipped to a five-quarter low of 6.6 per cent in October-December 2018. In 2018-19 GDP growth slipped to 5-year low of 7 per cent, from 7.2 per cent in 2017-18. The growth was 8.2 per cent in 2015-16 and 2016-17, 7.4 per cent in 2014-15, and 6.4 per cent in 2013-14.

Pant further said policy focus should be on increasing capex without compromising on fiscal consolidation, taking steps to mitigate farm distress and address labour and employment issues.

According to PwC India Leader Public Finance and Economics Ranen Banerjee, the challenge will be to contain CAD that will face pressures from growing crude prices and headwinds to exports because of trade tensions and slowing global growth.

CAD, which is the difference between inflow and outflow of foreign exchange, widened to 2.5 per cent of GDP (USD 16.9 billion) in the third quarter of the current fiscal, from 2.1 per cent of GDP (USD 13.7 billion) a year ago.

S&P's Roache, however, said India should take advantage of the current trade disputes between the US and China to increase its participation in global supply chains and benefit from the positive growth and technology spillovers.

"This will require a well-thought-out reform agenda to improve India's investment attractiveness and competitiveness," he said.

PwC's Banerjee said infrastructure investments have to be continued by the government as part of its capex. "The revenue collections may fall short of estimates and this would put pressure on the fiscal deficits given some of the newer social sector programmes launched and uptake of some of the schemes growing over the year viz. Ayushman Bharat," he said.

EY India Chief Policy Advisor D K Srivastava said the immediate task before the new government is to stimulate demand in the economy and uplift investment sentiments.

"On the monetary side, two successive policy rate reductions of 25 basis points each have not yielded tangible results as yet. One more repo rate reduction of 25 basis points may be considered. This should be supplemented by a fiscal stimulus," Srivastava said.

In the short run, both consumption and investment demand should be stimulated. "An additional repo rate reduction of 25 basis points and frontloading of government expenditure and bringing forward the presentation of the full year budget should be government priorities," he added.

Next Story