THE GIST of Editorial for UPSC Exams : 30 MAY 2019 (Breaking out of the middle-growth orbit (The Hindu))

Breaking out of the middle-growth orbit (The Hindu)

Mains Paper 3 : Economy
Prelims level : NBFC
Mains level : Reforming NBFCs

Context

• The financial sector is gasping under a liquidity crunch.
• A crisis is building up in the NBFC space that could snowball across the entire sector and worse, even the economy itself.
• This, even as banks are still clawing their way back to health after digesting large write-offs.
• Going by the high-frequency data on the economy, it is likely that GDP growth in the fourth quarter of 2018-19 will be below 6.5%.
• It was 6.6% in the third quarter that ended December. At this rate, it might be difficult to touch the 7% mark for fiscal 2018-19.

Rescuing NBFCs

• This should be the first priority for the new Finance Minister. Even as banks are showing incipient signs of recovery from the non-performing assets (NPAs) issue, the non-banking financial sector seems to be lapsing into trouble.
• Beginning with the IL&FS collapse, the NBFC space has been hit by one problem after another and the thread running through them all is the drying up of liquidity.
• The NBFCs have been crying hoarse for liquidity support from the Reserve Bank of India (RBI), but the regulator has been reluctant to do the one thing that will help them the most — open an
  exclusive funding window.
• The central bank may have its own valid reasons for not conceding the demand but the truth is that there is a real crisis out there and a risk that the contagion will spread.
• Usually it is the real sector’s problems that spread to the financial sector but in this case there is a real possibility of the reverse happening. The new Finance Minister will have to work with the RBI and banks to resolve this issue at the earliest.

Drive consumption

• The high-frequency data coming out over the last few months point to a demand slowdown in the economy.
• Commercial vehicle off-take has been in the negative territory for the last few months following a drop in freight volumes and also tariffs.
• Passenger car sales, that were weak through 2018-19 with growth of just 2.7%, actually fell by 17% in April, which is the sharpest drop in eight years. Two-wheeler sales fell by 17% in 2018-19.
• Consumer durable and fast-moving consumer goods sales have been tepid too. Even domestic air traffic growth fell for the first time in six years in April.
• These trends are validated by the monthly factory output data after a flat, no-growth February, output contracted by 0.1% in March.
• In an economy such as India’s excessively dependent on domestic consumption, a fall in consumer spending spells trouble.

Key tasks ahead

• A return of private investment is crucial to ensure the other important objective of this government: creating jobs.
• As businesses invest more to expand capacities, hopefully more jobs will be created.
• The introduction of Goods and Services Tax (GST) and demonetisation were in no small measure responsible for the slowdown in the economy.
• Despite frequent tweaks to rates, product classifications and procedures, the GST remains a work in progress and needs to be streamlined.
• The best that the new government can do is to quickly move to a set of just three rates from the six now.
• About 62% of goods and services are now taxed at 18% and above, which is rather high.
• The median rate should be reduced to 12% in phases certainly 16% to start with given that the GST is a regressive tool that taxes the rich and the poor alike.
• Revenues have stabilised at around ₹1 lakh crore a month now despite a number of products being moved to lower tax slabs over the last few months.
• It is time to get bold and reduce rates to spur consumption. Widening the basket and stricter enforcement are better ways to increase revenues compared to high rates.

Conclusion

• Meanwhile, the farm sector is crying out for attention too.
• The new government will certainly be focussing on the crisis in agriculture, and the outcomes will determine the health of the rural economy.
• He expended tremendous political capital in his first term on measures such as demonetisation which had questionable returns.
• He should use his renewed capital now to push through important reforms that will help the economy break out of the shackles of middling growth and push it into a high-growth sphere.

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Prelims Questions:

Q.1) Consider the following statements about Hydroelectric power projects in India:
1. All plants with less than 500 MW of installed capacity are categorised as small hydro projects.
2. Ministry of Power is responsible for all the hydroelectric projects in India.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: D
Mains Questions:
Q.1) The second Modi government faces a challenging economic agenda it must back key reforms. Analyse the statement.