The Indian economy has been hard on optimists as growth woes worsened in 2019. For the first time since 2008 when the financial crisis in the US impacted the rest of the world, India's GDP grew below 6 per cent year over year for three consecutive quarters.
The latest GDP numbers confirm that the current slowdown is the longest since liberalisation driven by weak private domestic demand and exports. Although the year ended with a few positive news on improvements in PMI indices for manufacturing and services, auto sector sales, new project investments, tax collections, and the global trade scenario, uncertainties around a sustainable rebound of demand continue to weigh on economic activity.
While growth concerns are bringing sleepless nights to policymakers, the fiscal deficit for the period April-October crossed this fiscal year's target of 3.3 per cent of GDP indicating further stress on government finances.
With government revenues likely to be low because of the economic slowdown and reduced corporate tax rates, there are concerns over fiscal slippage this year unless the government decides to curb expenditure. For an economy whose growth has primarily been supported by government expenditure over the past few quarters, a cut in spending may not be an option for the government.
There has been a slew of policy announcements made by the government over the past few months addressing structural issues to boost both the demand and the supply in the economy.
Announcements such as the reduction in corporate tax rates, and support for auto and real estate sectors, among others, were made to address a few structural issues faced by Indian industries and reinvigorate private investments and hiring.
Recapitalisation of banks and the amendment to India's bankruptcy code enabling the resolution of financial companies were big steps toward improving the liquidity and solvency issues among the ailing NBFCs.
These are expected to improve India's financial health and credit growth. On the monetary policy front, the RBI has slashed policy rates by 110 basis points in 2019 to spur credit growth and generate demand.
To further the efforts, the government accelerated its Rs 102 lakh crore infrastructure investment plan and set up a task force headed by Economic Affairs Secretary in December that would create a road map for the national infrastructure pipeline from 2019-20 to 2024-25.
With investment allocations announced for projects in the infrastructure sectors (economic and social infrastructure), this massive spending is expected to spur economic activity owing to this sector's strong inter-linkages with the rest of the economy.
In addition, such a massive investment will likely create jobs (including for the unskilled), boost rural income and purchasing power, and provide equitable access to infrastructure for all, thereby improving economic efficiency and productivity.
Despite the spate of efforts being made, uncertainty lingers as there are reservations about whether these are enough to prevent the economy from freezing, with sluggish domestic demand and global headwinds weighing on the future outlook.
For instance, despite policy rate cuts, credit growth has failed to pick up substantially. Similarly, there is not much visibility on the financing of such a huge infrastructure investment plan.
Given the state and Centre equally share 78 per cent of the burden of the spending, this will reflect in a rising government fiscal deficit in the coming years. One may argue that infrastructure assets are built for and consumed by several generations, and therefore postponing the payment onto the future generation may not be unreasonable.
However, a significant fiscal slippage under current circumstances may not bode well with investors and rating agencies.
The other bigger challenge will be that of dealing with persistent structural bottlenecks such as land acquisitions, labour challenges, environmental and other regulatory clearances, and complicated tax processes for a hurdle-free implementation of these massive projects.
These roadblocks, which also impact the ease of doing any business in India, not only add to the project costs but also cause significant delays triggering stress on the financial sector and ease of living.
With the massive electoral mandate that the current government has got, there is an expectation that the government may address some of the difficult and bolder issues in the upcoming budget.
To begin with, the government should focus on improving the institutional structure and removing obstacles that constrain growth. Undertaking difficult and bolder reforms of land, labour, regulations, governance, the business environment, and the public sector will not help in reducing the cost and improving the ease of doing business in India but also unleash India's economic potential in future.
Necessary amendments should be made to simplify the GST structure, rationalise the rates, and ensure a seamless flow of input tax credit, among others. This will go a long way in improving compliance and competitiveness.
It is encouraging to see the government's effort to engage the private sector in projects and address financial gaps through public-private participation.
To further the relationship and encourage private participation, the government should involve them more as operators and stakeholders on a diverse set of projects with long gestation periods (such as infrastructure) and improve the dispute resolution mechanism.
All eyes will be on the budget with expectations that the government will do what it takes to get the economy back on track.
(The author is Economist, Deloitte India)