The faltering economy:

The faltering economy:

Context

Last week, the current account deficit (CAD) widened to a four-year high. A set of weak economic numbers has left the Central government scrambling to do something to set things in order. Finance Minister Arun Jaitley last week promised appropriate action to revive the economy.

A set of weak economic numbers

The expansion in gross domestic product slowed to a multi-year low of 5.7% in the first quarter of 2017-18,

Industrial output growth dropped to 1.2% in July, compared to 4.5% a year earlier.

In addition, retail price inflation jumped to a five-month high of 3.36% in August from 2.36% in July, further dimming the prospects of a monetary stimulus from the Reserve Bank of India to help boost the economy.

To complicate matters, we have a widening Current Account Deficit.

A number of factors could be responsible for this:

Merchandise exports: One of the major reasons for the current deficit is the greater increase in merchandise imports than exports

Increase import of Gold:Imports increased because of a rise in demand for gold(almost threefold) due to the upcoming festive season and tweaks in trade pacts with countries such as South Korea

Services -Fall in exports of Services due to domestic industry issues and increased protectionism worldwide.

Lower farm growth and government expenditure.

The prolonged effect of demonetisation

The consequences of new tax regime(Introduction of GST)

What could be done to revive the economy?

There is  talk that increased fiscal spending to the tune of Rs. 50,000 crore or more may be approved by the government to make up for lack of private investment.

A fiscal stimulus would revive spending in the short term and  will not address any of the production bottlenecks in the economy

In addition, the imports of Gold need to be checked.  Tweaks in FTA’s  with foreign countries should be corrected to check illegal trade from third parties. The example of in the current scenario is that of the Illegal imports from South Korea that is not even amongst the world’s major producers or exporters of gold and related products.

The various rigidities in the market for land and labour have been holding back the economy for decades now, stopping investors from risking their capital on large-scale projects needed to boost growth. This needs to be addressed to find a viable solution to the problems.

Further, the overall unease involved in doing business in the country and the even larger uncertainty looming around the rules that govern the conduct of business have seriously held back growth.

Effects of new tax regime should be carefully watched.

Incentives to exporters and increase in budget expenditure to their interest.

India should be prepared for the impending tightening of  monetary policy regime in U.S. and other countries as India has survived the current deficit on account of a strong capital account surplus.

Also, India should seek to resolve the impending issues with other countries and organisations such as EU(regarding IPR regime and others) so that the India-EU FTA process could be hastened which could prove to be a major boon for services sector. Similarly, India’s push for a Services pact alongwith a goods pact in RCEP is a atep in the right direction.