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Economic slowdown: Tough times call for tough measures, here’s what govt needs to do now

If the government wants to fix the economy and kickstart investments it must begin by convincing banks to start lending again.

Going by the new highs in the stock market one would imagine the economy is on a roll. Far from it. Loan growth is at multi-year lows, demand for power has now fallen five months in a row, car sales continue to crawl, rural wages are barely rising and consumer confidence is shaken.

If the government wants to fix the economy and kickstart investments it must begin by convincing banks to start lending again, re-assuring bankers they will not be harassed if loans go bad and getting the investigative agencies off their backs.

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It’s pointless having a liquidity surplus if all the money— close to Rs 3 lakh crore — is going to be parked with Reserve Bank of India (RBI). And if lending rates are to come down—real rates have actually been rising— interest rates on small savings must be slashed.

Two, government must re-assure industry regulation will be fair and stable across sectors; businesses today are fearful the playing field may not always remain level and be altered to the advantage of a few. It’s equally important that banks, who lend to large corporations, believe regulation will be impartial and irreversible. The telecom episode, with its colossal destruction of capital, would have shattered bankers’ confidence; a repeat will ensure they stop lending to big businesses altogether. The government must also make it easier for companies to do business by doing away with needles red tape and by easing labour laws, an area in which there has been no progress in the last six years.

This is important because government is not in a position to spend, given its balance sheet is now hugely over-leveraged– and it cannot hope to achieve its infra-spending targets without foreign or private sector capital.
India’s ranking on the EODB charts may be rising but investments are decelerating.For a sample of 3,134 companies, growth in gross fixed assets slowed down to 5.7% in H1FY20 from 8.3% in H1 FY19, a CARE analysis shows; parallelly long term borrowings grew by just 2.8% in H1FY20 compared with 6.5% in H1FY19.

To compound the problem, household savings have slowed sharply in the last few years and could decelerate further; this despite the fact that real interest rates remain elevated. The complete absence of reform in agriculture has compelled the government to roll out out schemes for farmers that use up money without any assets being created. Real wages for rural workers contracted in Sept-November period evidence that the farm economy is far from a recovery. Consumer confidence is severely dented and at historical lows — the reading for private consumption in Q1FY20 was just 3.1% y-o-y, nowhere near the 10.1% y-o-y seen in Q1FY18 or even the 8.1% y-o-y posted in Q3FY19. Without tough policy action, there’s little chance of an economic rebound.

Source: Financial Express