Economy please

Economy please

Wake up to the ongoing slowdown, ditch populism and go for reforms.

Reserve Bank of India governor Shaktikanta Das last week said that the global economy seems to be moving into a new and “unsettling” phase. His prognosis is backed by disconcerting data. IMF recently lowered its growth forecast for India in 2019 to 7.0%. But what should bother India’s economic policy makers is that this year every successive revision has been downward.

Growth dropped to a low of 6.8% last year and 5.8% in the most recent quarter; there are many who believe even these figures to be exaggerated as proxy indicators such as credit and export growth don’t bear them out. The Sensex, which had soared above 40,000 after BJP and Prime Minister Narendra Modi swept the Lok Sabha elections, has fallen nearly 2,500 points since finance minister Nirmala Sitharaman’s lacklustre budget. It slapped on fresh taxes and tariffs which is driving foreign investors away and doing nothing to ease India’s long-running domestic investment slump. Meanwhile there are signs that demand, the one engine driving the economy so far, is also cratering. Look at the bellwether auto industry, where vehicle sales are in free fall.

All this is happening even as the global environment is worsening. Clearly, urgent action is necessary. An uncertain environment needs to be combatted with the promise of stability and reforms. Stability in economic policy should begin with direct taxes. The budget’s decision to levy the so-called super rich tax negatively impacted some stable foreign portfolio investors such as pension funds. Government’s defence of the step was unconvincing and it triggered an avoidable conversation about the whimsicality of India’s direct tax regime. A report on a comprehensive reform of direct tax code is in the works. Once it’s finalised, government should spell out a road map of reform and implement it.

Despite the surge in protectionism globally, there are opportunities available to economies which avoid that route. To illustrate, the fallout of US-China trade friction has allowed Vietnam to attract more direct investment from companies. India should grab this opportunity while it lasts. To do so, government should reverse the policy of the last couple of years where protectionism has been used to help domestic companies. Import substitution has been tried earlier and it doesn’t work. Finally, a stable policy environment should be complemented by macroeconomic stability. In this context, it’s best to avoid an overseas sovereign bond issue now.