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THE GIST of Editorial for UPSC Exams : 22 MAY 2019 (The immediate challenges for the next finance minister (Live Mint))

The immediate challenges for the next finance minister (Live Mint)

Mains Paper 3: Economy
Prelims level: Not Much
Mains level: Economic challenges for India in 2020

Context

The next government will take charge in New Delhi against the backdrop of many years of economic stability.
The question it will have to ask itself is whether this is the calm before the storm.

Controlling inflation

It was near double digits in the 12 months before the 2014 national election.
It has averaged around 3.25% in the 12 months before the 2019 national elections, below the middle point of the inflation target given by the government to the Reserve Bank of India (RBI).
There is no doubt that the Modi government got lucky with global oil prices, but it is useful to remember that core inflation has also halved over the past five years.
The steep decline in core inflation—which does not include food and fuel prices shows that macroeconomic policy played an important role in taming price pressures.
The most recent economic data should worry the next man or woman in the finance ministry. India is very clearly in the midst of a cyclical downturn, even if one looks past the debates on how economic output is being calculated.
The Indian economy expanded at 8% in the first quarter of fiscal year 2019.
It is likely to end the year with economic growth at 6.3% in the fourth quarter or 1.7 percentage points lower than the first quarter. It could be even lower in the three months to June 2019.

Weakening the aggregate demand

The most recent consumer spending data is worrisome.
This is not just a matter of the money illusion nominal spending going down because of lower inflation. Even volume growth has been weak.
There are other warning signs as well. Imports other than oil and gold have contracted for three months in a row on an annualized basis.
Unless there has been a large switch from imports to locally produced goods, the trade data can also be used to illustrate soft domestic demand.

Immediate policy options for the next finance minister

The first temptation will be to open the spending taps in the Union Budget that will in all probability be presented in July. However, India is already facing fiscal fatigue.
The fiscal accounts are already under pressure because tax collections have been lower than expected.
The government has also been on a borrowing spree through agencies such as the Food Corporation of India.
The Union government, state governments and public sector agencies together are already borrowing around 8.6% of gross domestic product, according to J. P. Morgan.
That leaves very little financial resources to support the incipient and overdue recovery in private sector investment.
The fiscal fatigue described above is the primary reason market borrowing rates have not budged despite reductions in the policy interest rate by the central bank.
It is also the reason that RBI has brought in $10 billion through three-year swaps with banks, in an attempt to increase the stock of money since the cost of money is not doing the trick.

Think of it as the Indian version of quantitative easing.

Fiscal space to support domestic demand

There is not enough fiscal space to support domestic demand for now.
The export engine has not been firing for the past few years either.
There is reason to hope that India could be one of the beneficiaries of the ongoing trade friction between the US and China, as this column has previously argued, but the more immediate challenges still remain.
Export growth has been anaemic. The world economy could also be ending its synchronized upturn.
All this is overlaid by a funds crunch in some parts of the Indian economy because of the confidence crisis in non-bank financial companies (NBFCs).
The new government will have to first assess the extent of the problem followed by moves to ease the situation.
Asset quality reviews on the major NBFCs should tell a lot, and it is likely that the public sector banks will be asked to offer credit lines to lending firms in trouble, with all the obvious moral hazard issues in tow.

Way forward

The current combination of macro indicators should not cause any alarm but there is definitely cause for worry.
The economy is losing momentum, food inflation is inching up, the current account gap is widening, there is fiscal fatigue, monetary policy transmission is poor and there is a funds crunch in some parts of the economy.
The bigger task for the next government will obviously be structural reforms that can support economic growth for the next decade, but the more immediate challenge is to deal with the immediate economic situation.
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Prelims Questions:

Q.1) Which Buddhist text contains rules and regulations of monastic life and the daily affairs of monks and nuns in Sangha?
(a) Sutta Pitaka
(b) Abhidhamma Pitaka
(c) Vinaya Pitaka
(d) Mahavamsa