DNA Edit: Widen consultations- Govt needs to admit it has an economic problem

While politically the Modi government is riding at an all-time high, its popularity bolstered by its decisive steps in Kashmir, it is on the economic front that it needs to watch its steps. For instance, weak economic data is taking a toll.

This week, investor sentiment was positively wobbly when the Sensex took the year’s biggest fall in percentage terms, down by 770 points-28 out of index’s 30 constituents closed in the red. What is bad news is that dwindling investor confidence, combined with foreign fund selling, could result in the market slipping further.

A six-year low GDP growth rate of 5% for the June quarter announced last week, a weakening rupee and below expectation industrial production data, have all played a part. Sadly, the 5% GDP slowdown could slump further, since the problem is structural in nature. It would be fair to say, however, that the slowdown is also cyclical. One of the best ways of going about would be to actually admit that there is a slowdown- to reform, it is important to admit that there is a problem. Alarm bells were chiming loudly when growth had slowed to 5.8% in the previous quarter, but a carnival of political issues overshadowed economic slowdown. Almost all Indian sectors including auto, manufacturing, agriculture, FMCG, real estate and construction have done badly, reveals National Statistics Office (NSO) data. Weaker consumer demand and slowing private investments are the two key factors behind the ordeal of core Indian sectors, many of whom have openly given out SOS signals, for those who care to see.

Any economy can prosper, if foreign investors look at it favourably. In the case of India, that is not happening. Foreign investors are constantly withdrawing capital from the Indian market. They pulled out Rs 5,920 crore in August, even after the government announced a rollback of enhanced surcharge on foreign portfolio investors (FPIs). Indian investors have also become wary, as major companies, especially from the auto sector, have been posting huge dips in profit, with many reporting bad losses. Nonetheless, before the global economic crisis hits prominent economies, starting with the US as early as 2020, according to a survey of top US economists conducted by the National Association for Business Economics, India will need to take urgent steps, some of which the Modi government has indicated.

For instance, doing away with all enhance surcharge on FPI and on domestic investors in equity. The government needs to broaden the ambit of its consultation with economic experts, some of whom have been urging it to focus on boosting investments, which could help in reviving consumer demand and increasing the output of key sectors. There is dire need to revive MSMEs, the backbone of multiple Indian sectors, which is still reeling under the impact of demonetisation. Battling the economic slowdown may require a slew of complex steps over the next few months, but there is no harm admitting that a problem exists.