Strong Rule, Weak Economy

Contrary to expectations, reelection of a stable government has done little to warm up the economy

- Lola Nayar and Jyotika Sood

bSenior economist Shashanka Bhide says India is looking at very modest rates of growth ahead as investments and consumer sentiments will take time to pick up. So far, public sector investment has been keeping the economy going, but even that is on the decline. “Return of a stable government does not seem to be enough. Policies to promote new areas of development have not happened and clear signals on reforms are still missing. One reason for this may be the global economic conditions,” says Bhide.

Attributing the dip in business optimism partly to lack of policy effectiveness, D.K. Srivastava, chief policy advisor of EY India, says the government has failed on two fronts. It has failed to improve demand, particularly consumer demand, through monetary policy stimulus by reducing policy interest rate by 25 basis points in three-time installments or 75 basis points in this calendar year. “But only 40 per cent of the rate reduction has been transmitted, so the effect has been partial and demand for consumer durables or investment goods has not picked up sufficiently. The message is clear—the monetary policy is not working,” says Srivastava.

On the fiscal policy, Srivastava feels the budget did not come out with a clear direction. “The government’s own investment demand is limited to only 1.6 per cent of the GDP, which is only about 5 per cent of the total investment demand in the system,” he says. “The budget could not push up investment demand by the domestic sector, which people had been expecting. Further, the government’s investment through public sector enterprises, which was about 2.4 per cent of the GDP in 2018-19, seems to have gone down to around 2.1 per cent in this budget.”