India’s growth slowdown: Reflections of the Reserve Bank

India’s recent growth slowdown has elicited a lively national discussion – see here, for example. It was reinforced by a scathing op-ed by Yashwant Sinha, BJP member and a former finance minister. Sinha also engaged in a vituperative and personal attack on the current finance minister Arun Jaitley and held him responsible for the ‘current mess’ that the Indian economy presumably is in. He highlighted what he considered to be a disturbing case of self-censorship and an atmosphere of fear and intimidation that silence the voices of critics within the BJP.

Of course, other members of the government rose to the defence of Jaitley and the government at large. Prime Minister Modi himself broke his silence, blaming his critics for spreading despair when it is not justified. Yes, growth has faltered. It has done so quite often in the past, but it will bounce back because the government is determined to ensure that appropriate policies and long-term reforms are in place to sustain India’s growth momentum. The current World Bank president offered solace and support proclaiming that the growth slowdown in India is an ‘aberration’.

Beyond the political noise and rhetoric, and the suitably diplomatic intervention of the World Bank, what is the analytical and evidence-based reflection from the government on India’s current growth and prospects for the future? I reached for the latest Monetary Policy Report (MPR) of the Reserve Bank of India (RBI) to find out both for what it says and does not say.  This is what the MPR offered:

‘…real GDP growth fell below 6 per cent in Q1:2017-18 for the first time in thirteen quarters’. RBI attributed this to a variety of factors. These include: (a) ‘a distinct slowdown in exports’, (b) ‘ loss of momentum in agriculture and (c) a sharp decline in industrial production that hit a ‘20-quarter low’ in Q1:2017-2018’. The MPR highlights a ‘collapse in GFCF (gross fixed capital formation)’, while private consumption expenditure slumped as well. The only glimmer of hope lies in the services sector which has remained resilient so far.

What also stands out in the MPR is the potency of fiscal action. As the report notes, ‘…excluding the support from the robust growth of government final consumption expenditure (GFCE), real GDP growth would have slumped to a mere 4 per cent in Q4:2016-2017 and 4.3 per cent in Q1: 2017-2018’ (italics added). Yet, it is also wary about further fiscal loosening because of concerns that such an act would be inflationary.

Despite compelling evidence that shows that the current growth slowdown in India is broad-based, the Reserve Bank is optimistic and projects a return to growth in excess of 7 per cent in 2018-2019. There is no clearly specified framework or countervailing policy actions that can satisfactorily explain the reversal of the growth slowdown.

The MPR is also notable for what it leaves unsaid. Apart from a reference to the disruptive roll-out of the GST and its adverse impact on growth, the MPR has little to offer on either the short-run or long-run effects of demonetisation that took place last November (other than suggesting that it is a beneficial development). There is little or no analysis on the impact of the growth slowdown on the labour market. Others are more forthcoming. The Centre for Monitoring Indian Economy (CMIE), for example, claims that demonetisation has led to a noticeable decline in India’s already low labour force participation. This, if it persists, does not augur well for future economic prospects.

The MPR reflects a standard feature of policy discourse in India which might be called ‘growth fetishism’. All it seems to care about is rapid growth in a non-inflationary environment. Growing in excess of 7 per cent seems to be the holy grail of the current Indian government and its key stakeholders. Certainly, 7 per cent plus growth, if sustained over time, would be a commendable achievement, but it is not sufficient to ensure that the fruits of such growth will be widely shared.

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