Brace for slowdown

RBI surveys point to fragile growth momentum

The Reserve Bank of India’s surveys of consumer and producer confidence suggest that optimism about the Indian economy is coming off earlier highs. This suggests that the growth momentum may be slowing. The reasons for this loss of momentum might be several. For one, higher costs are spreading through the economy as a result of rupee depreciation, import tariffs and a tighter supply side. In addition, more recently, financial constraints have begun to be a major choke point. While bank credit growth has long been relatively slow, for some time non-banking financial companies (NBFCs) were picking up the slack. But developments over the past month, particularly the scare surrounding defaults by Infrastructure Leasing & Financial Services (or IL&FS), have led to concerns about NBFC finance as well. More puzzling perhaps is why consumer confidence about spending has declined while confidence about incomes holds steady. But even so, it is clear that the economy will struggle to hold an 8 per cent growth rate.

In other words, India and Indian policymakers must brace for a slowdown. This comes at an inconvenient time politically and economically. Politically, there will be a few important assembly elections that will determine the configurations of political parties going into the all-important general elections, which will likely be in April-May next year. Thus, there will be considerable pressure for populist spending of one kind or another. Attempts to alleviate rural distress will stress state and Union budget deficits. And, already, attempts have been seen to control the rise in prices of petrol and diesel. Yet if the government persists with such spending or taking on more debt, it will further tighten borrowing for others. The government must resist the temptation to widen the fiscal deficit, even though this is an election year. The fragile nature of the growth recovery demands extra caution from policymakers.
 

On the monetary policy front, while the RBI’s concerns about a slowing economy will no doubt be reflected in the discussions of the Monetary Policy Committee, it must also be clear that inflationary pressures are building up and will have to be fought. Oil prices and rupee depreciation will have their effect on domestic inflation. The path of global crude oil prices is uncertain, but there is every reason to believe that given the tensions in West Asia and the continued chaos in Venezuela, crude oil will remain at its current elevated level for some time. This will further strain the current account deficit because exports are not showing the much-needed buoyancy and imports aren’t revealing a significant deceleration, either. These costs will continue to ripple through the Indian economy, and the RBI will be forced to respond. India is once again caught between a dubious domestic demand recovery and worsening global conditions. As before, the government must realise that the only way out of this is further attempts to engender business confidence. A burst of reform before the general elections might aid both the recovery and its re-election prospects.