Business

Stimulus, repo rate cut needed to reinvigorate Indian economy

New Delhi, May 26 (IANS) | Publish Date: 5/26/2019 11:23:28 AM IST

A combination of stimulus measures along with fiscal discipline is prescribed to reinvigorate India’s economy which is ailing with low demand, receding production and stagnant wages.

In simple terms, the economy in 2019 faces many challenges like rural distress, slow pace of private investment and high finance cost. These together have subdued consumer sentiment which has further impacted everything from car sales to air passenger traffic.

Consequently, slipping demand has impacted production levels further stalling hiring levels and wages. 

“The government will have limited immediate lever from the fiscal space amid optimistic revenue assumptions. However the immediate focus of the policymakers would be to prop rural demand and improve agriculture terms of trade,” said Madhavi Arora, Lead Economist, Edelweiss Securities. “Besides, better monetary policy transmission of past cuts and possibly more cuts will likely be the focus of the monetary authority.”

The need for comprehensive fiscal support measures assume significance as the slowdown has become evident in sectors such as automobile, FMCG and aviation.

Specifically, the automobile sector has been impacted the hardest. Off-take data showed that in April, car sales which indicate urban and semi-urban demand declined 19.93 per cent to 160,279 units.

In the commercial vehicle segment, which is the key indicator of economic activity, domestic sales went down by 5.98 per cent to 68,680 units last month.

Similarly, overall sales of two-wheelers, which include scooters, motorcycles and mopeds, edged lower by 16.36 per cent to 1,638,388 units. Recently, State Bank of India’s Economic Research Department in a report said: “In Q4FY19, of 384 companies more than 330 companies exhibited negative growth in mid-line and bottom-line.”

“Perhaps, significantly depressed rural prices is disturbing rural income and weak demand is affecting the FMCG sector.”

Even on the macro-levels, the latest economic indicators, including Index of Eight Core Industries and Index of Industrial Production have shown a downward trend.

However, to complicate the matter further, the government also has to remain fiscally prudent. 

“Considering, the present fiscal situation it won’t be an easy walk for the government. In the interim budget, the fiscal deficit target for FY 2019-20 is set at 3.4 percent of GDP,” said Deepthi Mathew, Economist, Geojit Financial Services.

“In such a scenario, the government might resort to increased market borrowing that won’t work well for private investors.”

Industry observers also opined that not only public investment but also RBI’s monetary policy has to play a role in supporting growth. The RBI in April had lowered its key lending rate by 25 basis points (bps) to 6 per cent. 

A monetary policy easing allows banks to reduce their lending rates that helps both consumers and the industry to get cheaper finance.

“... private investments are not forthcoming, so public investment should continue to keep pace, which looks difficult given the current fiscal constraints,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.  “Therefore monetary policy should do heavy lifting as fiscal policy is constrained.”

Additionally, a faster transmission of earlier policy easing by lenders is required, as high interest rates and liquidity constraints have demoralised auto, home and capital goods consumers. 

As per a Finance Ministry report in March, though easing of monetary policy has the potential to support growth, the recent cuts in repo rate are yet to be transmitted to the weighted average lending rate of banks, thus the effects of the easing on investment activity are yet to manifest.

 

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