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India’s Finance Minister Arun Jaitley on Friday, speaking at an economic forum in Mumbai, said there was no need to panic over a slowing pace of growth, but admitted that the government is facing a real “c
hallenge” in trying to find a balance between maintaining fiscal prudence and continuing with aggressive government spending.
Jaitley tried to allay fears of domestic and foreign investors, over the growing concerns of India’s economic health. A range of issues, such as slowing growth, rising current account deficit, the still worrisome health of Indian state-owned and some private banks which has curbed their ability to lend, poor private investments and job growth and concerns over exports at a time when protectionism across western economies is intensifying.
India grew by 7.6 percent in FY2016 and 7.1 percent in FY17, which was still one of the fastest growing nations amongst the world’s major economies.
But post demonetisation, consumer spending and manufacturing activity have both slowed, which has impacted growth. In the April to June 2017 quarter, India's GDP growth slumped to 5.7 percent – a three year low – and the slowest pace since the January to March quarter in 2014, as manufacturing activity slowed ahead of the GST rollout, even as the impact of demonetisation continued to be felt.
India’s current account deficit rose to $14.3 billion, or 2.4 percent of gross domestic product (GDP), in the June-ended quarter from $0.4 billion a year ago, according to reserve Bank of India data.
“There is no easy day in the management of an economy,” Jaitley said, speaking at the Bloomberg India Economic Forum 2017, in Mumbai. He admitted that there was some slippage in growth.
“There is no need for panic, but there is a need for analysis and responsive action to this.... and we are fully prepared for this,” Jaitley said.
“How do you maintain the balancing act between [the government] continuing to spend, supporting the country’s banks, strengthen them and yet maintain best standards of fiscal prudence. This is the current challenge which we are facing,” Jaitley said.
India’s banks have in recent years struggled with the problem of rising bad loans and stressed assets, after they had lent aggressively to companies for infrastructure projects, particularly in power, steel and road projects. Several of these companies have since turned weak due to delayed projects.
The finance minister however repeatedly said that discussions relating to a possible stimulus package from the government to revive the economy were completely speculative. “I will not get into specific moves as this leads to speculation. One cannot convert management of the economy into a fictional debate,” he said.
Commenting on the need to create stronger banks, Jaitley said that the government is still pressing for a twin objective: to consolidate banks and strengthen the, “But in the current environment, greater priority needs to be given to improve the health of our banks. I would rather have a situation where stronger banks merge rather than weaker banks merging,” Jaitley said.
India is also starting to witness a loss of jobs, particularly in the IT and banking sectors. According to a CMIE study, about 1.5 million jobs were lost during January to April 2017. The estimated total employment during the period was 405 million compared to 406.5 million during the preceding four months, September to December 2016. These estimates are based on consecutive Waves of CMIE’s Consumer Pyramids Household Surveys (CPHS).
Economists have already started to raise an alarm, if the government thinks of initiating a “stimulus package” to revive the economy.
Kaushik Das, chief economist with Deutsche Bank in India says that this fiscal stimulus "can potentially increase the central government’s fiscal deficit to 3.5 to 3.7 percent of GDP in FY18, from the budgeted 3.2 percent target (3.5 percent of GDP was achieved in FY17), depending on the size of the stimulus (0.3 to 0.5 percent of GDP)".
“This would be a setback to the fiscal consolidation momentum that was endured through the past few years. Fiscal slippage risks (both at the central and state finances level) will naturally make the RBI more cautious and defensive regarding their monetary policy stance and probably mark an end to the ongoing rate cutting cycle,” Das said, in a recent note to clients.
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