Limited scope for sharp recovery (Careful policy choices needed)

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 Limited scope for sharp recovery (Careful policy choices needed)

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• Slowdown in Indian economy: Since the first advance estimate of FY 2019-20 GDP came out at 5%, it is clear that the economy is growing at the slowest pace in a long time. Subdued private consumption and investment is hurting.
• Why the slowdown: It is largely due to a structural demand problem, along with some cyclical factors.

1. Incomes had been stagnant over past few years, but consumption was financed by lower savings, easy credit (NBFCs) and one-offs like Seventh Pay Commission payout, etc.
2. Household savings rate is down from 22.5% in 2013 to just 17.2% in 2018.
3. The present NBFC crisis has led to a drying up of credit, and it is negative now.

• Rural stress: Low wage growth and stagnant farmers' incomes has hurt badly. It's been just 0.6 per cent p.a. Rural folk have been hit hard by collapsing real estate activity in urban regions.
• Sharp recovery ruled out: It is clear that nothing can bring a sudden turnaround in the Indian economy now. 

1. Low household income growth is structural, so turnaround in consumption is not likely.
2. All balance sheets are under stress, so the turnaround in investments is unlikely.
3. Govt. consumption supported GDP growth so far, but with higher fiscal deficits, it's tough now. Total fiscal deficit is touching 9 per cent of GDP already.

• Demand side push: The govt. can cut income taxes, and pump money into rural sector - both demand side measures. But cutting income tax rates benefits a few, while lot of revenue is lost. After all, only 1.5 crore people had incomes above Rs.5 lakh p.a. (of the total 5.8 crore tax filers, AY 2019).
• Financial sector: Nursing banks and NBFCs back to health is crucial, to keep a steady flow of finance going.
• Taking India into the middle income group: We need to broad-base the income and consumption profile to enable that. From 1991 till date, many millions got enhanced capacity. Now, we need to enhance the capcaity of bottom of the pyramid.
• Four key infra areas: In electricity, transport, telecom and water, private sector is not fully involved.

1. Electricity - generation, transmission, distribution - private is in generation
2. Transport - Airports, roads, railways, metros - private is in roads and airports
3. Telecom - fully involved
4. Water - irrigation, sanitation, sewage, water supply - private is not involved

• Potential growth rate: From here on, policymakers need to focus on measures to raise the potential growth rate of economy. Build an enabling environment. Ensure better purchasing power. Use the present crisis.
• Summary : The present economic crisis should be fully utilised to build a blueprint for the future.

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