GDP growth has plummeted. As per IMF forecast, growth would recede to 4.8 percent in 2019-20 – the lowest since 2012-13. Nobel Laureate Abhijit Banerjee has expressed concern for the economy heading for recession. Job opportunities are in shambles. Lackluster demand has become the drag on the growth. Against this backdrop, the main task of the Finance Minister will be how to revive the demand.

GDP growth has been slipping continuously since the second quarter of 2018-19. Nation is in uproar, accusing Prime Minster Modi for his faulty policies. One of them was demonetization. which halted the investment spree of the Indian private sector. Small scale industries sector, the main source of employment generation, was shattered due to inadequate cash flow. The country has been roiling in jobless growth. Lack of job opportunities, contrary to PM Modi’s heightened hope in the pre-2014 election manifesto, has been fueling the negative sentiment about the government.

Export is not a significant component of Indian economy. Eventually, it could offset the damage to the demand. It accounted for 12.2 percent share of GDP in 2018-19. Export too witnessed slower growth in 2018-19. It increased by only 8.8 percent in 2018-19, against 10.2 percent in 2017-18.

Nevertheless, the foreign investors were unperturbed. They continued to repose confidence in strong parameters of Indian economy. Foreign Investment made a boom. FDI spurred by 43.4 percent in between 2014-15 and 2018-19 – from US $ 30.9 Billion in 2014-15 to US$ 44.3 Billion in 2018-19. Since the role of foreign investment is not significant, it failed to impart a major compensatory impact on the overall investment in the country.

The dynamism between domestic and foreign investment translates into a new synergy in the landscape of investment. Even the downturn in GDP growth could not damage the foreign investors’ zeal to invest. During half of 2019 (January – June), foreign investment spurred by 25 percent. This reflects that foreign investors were unnerved by the contraction in GDP.

Global rating agency Standard & Poor viewed the downturn as a cyclic phenomenon. It said: “India remains a growth outperformer on long-term basis…..The current slowdown is largely cyclical and the growth is expected to improve on the basis of an uptick in consumption, stable oil prices and strong monetary policies.” IMF’s forecast also raised uproar. But, it also viewed the downswing as temporary phenomenon.

Notwithstanding BJP’s thumping victory in the Lok Sabha election in May 2019 reinforced people’s confidence in Modi’s ruling. Inspired by the unshaken trust, Modi 2 government took a vow for a new challenge to shift the gear to new strategies and put new strength in Make in India, which lost steam in Modi 1. In its report on “Strategy for New India @75”, NITI Aayog – the government think tank – decoded new challenges to reboot the Make in India sentiment.

The report targeted the economy to reach US $ 4 trillion by 2022-23, from US $ 2.7 trillion in 2017-18. It identified that the domestic investment was crucial for the growth. To reinvigorate the domestic investment sentiment, the report suggested a big jump in Gross Fixed Capital Formation (GFCF), which was low in Modi -1 period. It recommended that GFCF ratio to GDP should rise from 29 percent in 2017-18 to 36 percent in 2022-23. It emphasized that unlike in Modi-1 period, government investment should also play a crucial role in boosting domestic investment. In 2016-17, government contribution to GFCF was only 4 per cent to GDP. The ratio should increase to 7 percent by 2022-23, the report suggested.

There were two areas which were identified to have big potential for government expenditures and boost GFCF. They are urban housing and infrastructures.

Domestic private sector is the core investor in the country. It accounted for 47 per cent of the total investment in new projects in 2018-19. It declined sharply by 21 percent in between 2014-15 to 2018-19. Following suit, government investment, such as in infrastructures, slipped drastically. It relied more on private sector to invest in the areas, which were vacated by government. It hoped that private investment would be crucial for the success of Make in India. Unfortunately, that hope was dashed.

It was observed that unbalanced investment made between big and small sector caused the loss of job opportunities during Modi-1 period. While big firms poured investment in capital intensive industries, such as automobile, drugs and pharmaceuticals, small firms were at decay. Eventually, labour intensive industries reeled under low investment.

This landscape of the investment strategies means that while foreign investors continued to repose confidence in Modi’s investment friendly leadership, private sector were reined by suspicion. Even the political row between India and China could not deter Chinese investment, which is a fast growing engine for foreign investment. Chinese investment spurred by over 136 percent in 2018 over 2017 – from US $ 165.2 million in 2017 to US $ 391.2 million in 2018.

To stimulate investment, NITI Aayog advocated rationalization of direct tax, such as corporate tax and personal income tax. This has become imperative to resuscitate the investment mood and bring the country at par with South East Asian countries. Accordingly, Finance Ministry lowered the corporate tax to 22 percent and 15 percent, who would not avail any incentive.

NITI Aayog focused on boost in FDI. Besides opening more areas, thrust should be given to those FDI which contemplate the buy-back arrangement. This will have collateral impact on country’s exports.

To tide over the sluggish demand, NITI Aayog focused on government’s role as frontrunner. It advocated enhancement of public procurement system. This can be leveraged by mega public sector projects, like Bharatmala (the biggest highway project), Sagarmala (the biggest Port project) and Pradhan Mantri Awas Yojana (housing for all).

In sum, though the present economy is reeling under stress, it has the potential to bounce back in the current year. IMF is of the similar opinion, professing the economy in a cyclical gyration.
(IPA Service)