Skip to main content

Need for corrective action (hindu)

Revised estimates show that demonetisation hurt, but a deepening investment slowdown remains the challenge

India’s economic growth estimates lately seemed out of sync with the dampened feel-good sentiment in the economy. The GDP was growing at a world-beating rate, the stock market was booming, but little on the ground suggested that people were feeling better off. Consumption and investment behaviours suggested probably not. So when in February this year, the state statistical apparatus estimated that the impact on the economy of demonetisation was muted, doubts were cast on its credibility.

Dissonance between the statistics and ground reports considerably reduced in the latest released batch of data into which the updated Index of Industrial Production was plugged in.

The GDP data for the fiscal year 2016-17 present a sharp picture of the state of the economy. GDP growth has slowed for the first time in five years, in 2016-17, to 7.1%. The economic recovery that was gathering pace year after year abruptly lost speed last year. Corrective action should help the economy regain the lost momentum. Quarterly estimates show that demonetisation certainly hurt the economy, but growth impulses had started weakening six months earlier. A thorough understanding of the slowdown’s causes will be crucial to the choice of policy tools.

Demonetisation’s disruption


Demonetisation’s damage is discernible in the last two quarters of 2016-17. It is more pronounced in the later one, when from January to March this year, coinciding with the peak cash crunch, gross value added (GVA) grew at its slowest pace in at least eight quarters. The loss of momentum is considerable. Growth slumped to 5.6%. Just four quarters earlier it was a robust 8.7%.

Construction and manufacturing, crucial sources of jobs, have been most severely affected. The GVA growth received a boost from agriculture that benefited from last year’s good rains and Government spending, largely immune to demonetisation. The growth in the rest of the economy, minus this contribution, was barely 3.8%. In the same quarter a year ago, this was 10.7%.

Given the extent of the disruption, a sharp, sustained reversal in GVA growth looks difficult. Projections of a quick bounce back seem optimistic. At the time demonetisation was announced, GVA growth had been on a downward slope. It had decelerated in the two quarters preceding demonetisation. The shock dragged it further in the next two quarters. From the peak of 8.7% in the January-March 2016 quarter, it lost momentum consistently, decelerating for four straight quarters.

Risks to the recovery


In the boom years during the United Progressive Alliance government’s tenure, four engines had powered the economy. Of those, just two were still running before demonetisation: government investments and private consumption. The other two, exports and private investments, were, and remain, out of steam. Demonetisation briefly killed the third, private consumption. As the cash crunch eases, consumption will probably revive. But the risk to the recovery is from the credit crunch that demonetisation worsened.

Credit growth plunged to a multi-decade low as banks were devoted to exchanging notes that ceased to be legal tender. This overburdened banks and took attention away from the pressing problem of bad loans, the impact of which is visible in the continuing slide in the gross fixed capital formation, a measure for investments. Decreasing for the fifth straight year, the share of gross fixed capital formation in GDP shrunk to 27.1% last year. It was 34.3% in 2011-12.

Investments, the principle engine of growth, remain unresponsive to macroeconomic stimulus. The government stepped up its public investments, even deferring fiscal deficit targets, but the increase is more than offset by the fall in private investment. Liberalising foreign investment policies and improving the ease of doing business has not pulled the economy out of the investment slowdown.

The message in the revised estimates relevant to policy decisions is that unresolved bad loans are restricting banks’ lending capacities, which is choking investments.

Investment slowdown


The investment slowdown is neither a recent development nor has data captured it for the first time. The government has so far played a passive role, first by relying on banks, and now on the Reserve Bank of India, to tidy up the bad loans mess. Unless addressed on a war footing, the credit crunch could stall the economy’s recovery. The quicker the banking sector recovers its health, the speedier will be the pullback. The stress, if unattended, will limit the effectiveness of the monetary support of lower interest rates.

Since the economy was on a smooth recovery path for the last four years, the slowdown should probably no longer be ascribed to the policy paralysis that characterised the dying years of Prime Minister Manmohan Singh’s government. The fresh bout of pain in the economy is to a great extent a fallout of decisions — both that were taken and those that should have been taken but were not — of Prime Minister Narendra Modi’s government.

Comments

Popular posts from this blog

Indian Polity Elections (MCQ )

1. Who of the following has the responsibility of the registration of voters
a) Individual voters
b) Government
c) Election commission
d) Corporations


2. Democracy exists in India, without peoples participation and co operation democracy will fail. This implies that
a) Government should compel people to participate and cooperate with it
b) People from the government
c) People should participate and cooperate with the government
d) India should opt for the presidential system


3. Which of the following are not the functions of the election commission
1) Conduct of election for the post of the speaker and the deputy speaker, Lok sabha and the deputy chairman, Rajya sabha
2) Conduct of elections to the state legislative assemblies
3) Deciding on all doubts and disputes arising out of elections

a) 1 and 2
b) 1 and 3
c) 2 and 3
d) 2

4. Which of the following electoral systems have not been adopted for various elections in India
1) System of direct elections on the basis of adult suffrage
2…

El Nino may make a comeback in 2017, but unlikely to affect southwest monsoon (downtoearth,)

In 2016, the world witnessed the strongest El Nino on record, which resulted in above average temperatures. The year experiences record-breaking heat for nine consecutive months. It had also ruined the Indian monsoon for two years. After two successive droughts in 2014 and 2015, last year witnessed erratic rainfall both in terms of geographical spread and time. Thanks to El Nino, the southwest monsoon in 2014 and 2015 witnessed a deficit of 11 and 14 per cent respectively.

While the 2016 monsoon season in India saw 97 per cent rainfall, it was far less than the 106 per cent that the India Meteorological Department (IMD) had forecast in July. The lesser-than-expected rainfall, especially in the second half of the monsoon season, has been attributed to the absence of a strong La Nina phenomenon in the equatorial Pacific Ocean that is known to help the Indian monsoon.

According to a recent forecast by the National Oceanic and Atmospheric Administration (NOAA), there’s a 50 per cent chan…

Current Affairs MCQ for UPSC Exams – 21 December 2016

Q.1- Which of the following is/are correct regarding Nirbhaya missile?

1. It is a cruise missile
2. It is hypersonic in speed
A. 1 only
B. 2 only
C. Both
D. None

Q.2- Khanjar-III is military exercise between which of the following countries?

A. India and Russia
B. Russia and China
C. India and Kyrgyzstan
D. Russia and Afghanistan

Q.3- UPI has been in news recently, what is the full form of UPI?

A. Unified Payment Interchange
B. Unified Payment Interface
C. Unified process interchange
D. Unified process interface
 .
.
.
.

.
.
.
.
.
.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.
.
Answer  1-A, 2 -C, 3-B