The warning signals in the Indian economy are too ominous to ignore. Plummeting growth rate, stagnating exports, slowdown in the manufacturing sector, dwindling private sector investments and widening current account deficit are the sources of worry. The outlook appears generally bleak, notwithstanding the government’s attempt to explain it away as a transient phase. The double whammy of demonetisation and the teething troubles in the implementation of Goods and Services Tax (GST) are dragging down the economy. A number of indicators like the GDP, IIP, credit offtake, investment and capacity utilisation point to a deceleration in real activity since the first quarter of 2016-17 and a further deceleration since the third quarter. The biggest disappointing feature has been the deceleration of growth to a three-year low of 5.7% in the first quarter of 2017-18, compared with 7.9% in the same quarter a year ago. This is the slowest pace of GDP growth since the NDA came to power in May 2014. Some economists have warned of serious downside risks in the days ahead if urgent course corrections are not made and the GST glitches are not fixed quickly. The sharp fall in growth rate cannot be entirely attributed to disruptive moves like the note ban and the GST because the downward trend had begun even before the demonetisation. Moreover, the businesses across the country had whittled down their production in the April-June quarter and focused on offloading the existing stock in view of the uncertainty about how the new indirect tax regime will treat earlier tax credits on inputs.
The latest data from the Agriculture Ministry, suggesting a poor monsoon in nearly 40% of the country, has added to the worries as a fall in food production could hurt the rural demand, aggravate farm distress and push up inflation. While the jury is still out on the long-term benefits of the demonetisation move, it is now clear that the growth rate in 2017-18 is unlikely to exceed 6.5%, though the earlier expectation was 7.5%. However, it is likely to pick up once the glitches in the GST implementation are resolved. The most important challenge before the government is to stimulate growth by fast-tracking the reforms in a wide range of areas, including land, labour and agriculture. Urgent steps are needed to boost private sector investments, which have been steadily falling. The manufacturing sector led the growth tumble, expanding by just 1.2% in the first quarter, compared with 5.3% in the previous quarter. This was the worst quarter for Indian manufacturing in five years. Overall industrial output also collapsed to 1.6% growth from 3.1% in the previous quarter. Restoring the banks to good health must get top priority to ensure new credit flow to boost investments.