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Aden - Yasmine El Tohamy - Declining consumption and investment, falling tax revenue among factors putting brakes on economic speed
India is now in the midst of a significant economic slowdown and must take steps quickly to reverse the downturn of an economy that has been one of the engines of global growth, the International Monetary Fund (IMF) has said.
"Declining consumption and investment and falling tax revenue, have combined with other factors to put the brakes on one of the fastest-growing economies in the world," the IMF said on Monday in its annual review.
Ranil Salgado of the IMF's Asia and Pacific Department said: "Addressing the current downturn and returning India to a high growth path requires urgent policy actions."
"India has been among the world's fastest-growing economies in recent years, lifting millions out of poverty. However, India is now in the midst of a significant economic slowdown," Salgado said.
His statement comes just around two months after the agency slashed the country's growth forecast by almost a percentage point from the 7 per cent projected in July.
"Recent labour market data suggests that unemployment is high while labour force participation has decreased, particularly for females. Without more inclusive and sustainable growth, India's potential demographic dividend over the next few decades, from its young and rapidly-growing labour force, could be wasted," the IMF report warned.
The report pinned the slowing growth of the Indian economy on the deceleration of consumption and investment that was made worse by regulatory uncertainty.
It said the relatively low food prices contributed to "rural distress".
Other contributing factors included the "abrupt reduction in non-bank financial companies' [NBFC] credit expansion and the associated broad-based tightening of credit conditions'" and some issues with implementing "important and appropriate structural reforms, such as the nation-wide Goods and Services Tax [GST]".
On a positive note, the IMF report said: "Over the medium term, growth is projected to gradually rise to its medium-term potential of 7.3 per cent" helped by a firming in investment and private consumption in the second half of the fiscal year.
"This is expected to be supported by the lagged effects of monetary policy easing, recent measures to facilitate monetary policy transmission and address corporate and environmental regulatory uncertainty, and government programs to support rural consumption being rolled out," it said.
The report said that the other contributing factors to an improvement would include "continued commitment to inflation targeting, gradual macro-financial and structural reforms, including implementation of reforms initiated earlier, such as the Goods and Services Tax and the Insolvency and Bankruptcy Code [IBC], as well as ongoing steps to liberalise FDI [foreign direct investment] flows and further improve the ease of doing business."
Salgado said that to get the growth rate going again, "ways to boost confidence in the economy" and a "substantial structural reform agenda to kind of reinvigorate confidence will be very helpful".
"By other measures, India still is doing well. Reserves have risen to record level. The current account deficit has narrowed. Inflation, although we have a little jump right now because of vegetable prices, we think [it] has been under control for the last few years. So, by other measures, India is doing quite well. The issue is primarily how to address the growth slowdown," Salgado said.
Former RBI governor Raghuram Rajan, who is now a professor of finance at the University of Chicago Booth School of Business, said to understand what has gone wrong, one needs to start first with the centralised nature of the current government.
"Not just decision-making but also ideas and plans emanate from a small set of personalities around the Prime Minister and in the Prime Minister's Office [PMO]. Extreme centralisation, coupled with the absence of empowered ministers and the lack of a coherent guiding vision, ensures that reform efforts pick up steam only when the PMO focuses on them, and lose impetus when its attention switches to other pressing issues. Often, these efforts take the form of grand gestures because the problems are large and require significant response - so we get demonetisation, bank mergers, corporate tax cuts. However, such episodic moves are not necessarily well-timed or synchronised towards a larger vision, so any associated economic benefits are diluted. Moreover, the follow-up to deal with the unintended consequences is inadequate since the line ministries are disempowered," said Rajan.
Dr Ram Buxani, chairman of ITL Cosmos Group, said the IMF's call for urgent action by India to reverse the economic slowdown is indeed a big buzzer to the country to adopt practical measures to achieve promises made during electioneering.
"We are moving rather too fast to cleanse the system which has caused negative impact leading world monetary agency to put us on alarm."
He said mosquitos and flies survive in filth and are part of nature.
"We can create a netting system so that they don't disturb healthy environment. They cannot be eliminated overnight. What has existed for 70 years cannot be brought to zero in a year or two. Particularly when we know that operators and beneficiaries are same. Economy growth of 4.5 is for grown economies. Not for our country. A five trillion [dollar] economy is a good dream but India needs to involve over the one billion population to achieve that. We are perhaps becoming over ambitious, which needs to be corrected," said Dr Buxani.
Abdul Moiz Khan, CEO and managing partner of Dubai-based Fursa Consulting, said the Indian economy has the core potential to rebound fast, "provided immediate corrective actions in vital sectors such as banking, finance and insurance are fast-tracked to accelerate sustainable retail spending, boost the ailing real estate industry and regain consumer confidence."
Editorial Director of Al Khaleej Today, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Al Khaleej Today. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.
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