New Delhi: Even as the Union Government has made a series of announcements that include relaxing foreign investment norms, concessions on vehicle purchases and encouraged banks to make loans cheaper to spur growth and recovery of economy, the prolonged consumption slowdown and a deteriorating global environment are likely to have adverse impact on recovery in Asia’s third-largest economy.
More than half of the decline in economic activity has been driven by a consumption slowdown, which appears to be broad contributing more than twice the effect of autos to the consumption decline.
Finance Minister Nirmala Sitharaman is still considering whether to use the windfall from the central bank to cut borrowings or boost spending as she is still mum on her plans on 1.76 lakh crore that the government had received from RBI.
The other measures announced so far, like the easing of foreign investment rules, will also do little to boost consumer demand in the near term.
Prime Minister Narendra Modi, who returned to power in May with a bigger margin than in 2014, is witnessing the worst slowdown so far under his watch.
Unemployment is at a 45-year high, car sales have slumped the most in almost two decades in July and infrastructure output grew at the slowest pace in more than four years.
“We recognize that consumption will have to be given a boost,” Sitharaman said in Guwahati Thursday, adding that the government will unveil more measures that address demands from businesses.
The Reserve Bank of India has already cut interest rates by 110 basis points this year to the lowest in nine years to boost loans and revive investment, while signaling it’s ready to do more. It has been pumping in liquidity to tide over a cash crunch in the banking sector.
According to many economists , the economic slowdown is taking longer than anticipated to turn around, with the slump likely extending into the April-June quarter. The reasons — a slow roll-out of a fiscal support package for farmers, and weak transmission of the Reserve Bank’s rate cuts.”
“The government has done only some tweaks to existing policies, but nothing that’s really big-bang,” said N.R. Bhanu Murthy, an economist at New Delhi-based National Institute of Public Finance and Policy. “Markets seem to be awaiting more measures. The government shouldn’t keep them in waiting.”
In the absence of any substantial fiscal stimulus, some economists feel the RBI may have to do more heavy lifting to support growth.
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