India has missed the boat for offering fiscal support to propel household demand and fuel economic growth, with the focus on monetary policy and rate hikes unlikely to revive business and investment confidence, senior economists have told GlobalMarkets.
In its World Economic Outlook report released this week, the International Monetary Fund cut India’s 2022 growth forecasts by 0.6 percentage points to 6.8%, blaming a weaker-than-expected outturn in the second quarter and more subdued external demand.
Similarly, the Asian Development Bank last month sliced India’s growth forecast for the year ending March 2023, to 7% from its earlier projection of 7.5% due to pressure stemming from high inflation and a global slowdown in growth.
“People had expected pent-up demand to trigger a sharp bounce-back, but they missed out on the fact that the pandemic caused deep economic scarring in India, mainly because India had a rather weak fiscal intervention,” Kunal Kundu, India economist at Société Générale, told GlobalMarkets.
However government does seem to be aware of some of the limitations from its moves so far, he said. Since the beginning of the pandemic, India’s fiscal deficit has risen, showing it has been spending to prop up the economy.
WEAK GROWTH
In its recent budget, finance minister Nirmala Sitharaman talked up a fiscal strategy for growth focused on boosting tariffs, increasing production and developing infrastructure projects, with the hope that household demand would flow through in return.
But Kundu said demand recovery would remain “extremely weak” and was unlikely to be the growth driver that it was before the pandemic.
“Household incomes have been adversely affected,” he said. “Also, the government hasn’t provided enough fiscal support to the micro and small and medium enterprises, which had to let go of workers during the pandemic and their employment numbers haven’t recovered yet. But we are well past the time to do these interventions now.”
The Reserve Bank of India (RBI) has been doing its bit to tame inflation by raising rates and intervening in the currency markets to support the rupee, which has been depreciating against a stronger dollar. But market watchers said monetary policy could not on its own impact growth without the authorities unleashing more fiscal support.
The other challenge is the Narendra Modi-led government’s sharp focus on becoming a manufacturing hub, including by providing production-linked subsidies to domestic manufacturers.
Raghuram Rajan, former governor of the RBI, said the country was “too focused on emulating the Chinese way of growth, by focusing on manufacturing. But given everything that’s happening on climate, can the world absorb another goods-producing nation after China? That’s a big question.”