Rural India key to spurring economy

It has always been known that the macroeconomic situation is better than what is actually seen on the ground at the micro level, and the Mid-Year Economic Review authored by chief economic adviser Arvind Subramanian and presented on Friday confirmed this, attributing it to poor global demand and the weak monsoon. What is interesting is that National Institution for Transforming India (Niti Aayog) vice-chairman Arvind Panagariya says he expects the growth rate to touch eight per cent by the fourth quarter of this fiscal. One wonders if he has a few aces up his sleeves that the finance ministry doesn’t know about.

Mr Subramanian, while revising the forecast downwards, said the future is challenging as the economy has been sending mixed signals, making it difficult to interpret what is happening in the economy. He cited indirect taxes as doing well but direct taxes as not buoyant, indicating that the corporate sector still has huge problems. This is also reflected in credit growth where personal consumer loans are growing rapidly at 15 per cent whilst loans to industry are growing slowly. The latter accounts for lack of investment by the corporate sector, which is stifling growth. It is public sector and government investment that is keeping the economy’s wheels moving.

The situation is like a Chakravyuha. India Inc. won’t invest as it is highly leveraged so it won’t get bank loans, and has been trying to cut costs and decrease investments in order to improve its cash flow. According to one estimate, their capital expenditure fell 19 per cent. Banks are reluctant to lend as they have to clear their current non-performing assets and don’t want to take on more risks. On the export front there seems to be little hope of global trade reviving though the revival of the US economy is reported to be stronger than expected. Whether this would help India is uncertain as she faces stiff competition from her eastern neighbours who have seen a hefty depreciation in their currencies compared to the Indian rupee. 

China has tried to tackle this global slowdown in trade by taking steps to increase domestic consumption. India should seriously undertake the same exercise instead of just talking about it. It needs to put more purchasing power in the hands of consumers in rural India through better, more equitable agricultural policies and pricing, and through aggressive implementation of schemes like the NREGS and Swachh Bharat, entrepreneurship, and several other initiatives taken by Prime Minister Narendra Modi to empower the bottom of the pyramid. These would give economic empowerment to rural India where 60 per cent or more of the population lives. Niti Aayog needs to generate more innovative ideas to spur growth if Mr Panagariya’s eight per cent prediction is to materialise.