Renewed growth concerns

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Bikky Khosla | 06 Dec, 2016
Our GDP grew at a lower-than-expected rate in the September quarter. Official data released last week shows that the Indian economy grew at 7.3% in second quarter, which is higher than the 7.1 percent in the previous one, but lower than the general expectation of 7.5%. The data came amid increasing concerns that economic growth could be impacted further in the present and next quarters due to the demonetisation scheme. A number of global banks and rating agencies have already downgraded India's growth, and the important question is: how to handle this situation?

Majority of experts believe that the adverse impact of cash-ban is going to be temporary, but it is equally true that a lot will depend on how the government manages the transition. The latest GDP data shows that manufacturing grew 7.1% against 9.1% in the previous quarter. Industry as a whole grew by 5.1% from 6% in the same period last year and gross fixed capital formation fell by 5.6% from a decline of 3.1% in the previous quarter. These figures, along with sharp drop in manufacturing activities in November as reflected by the Nikkei manufacturing index, imply that the government must act prudently to prevent further damage.

There is little doubt that the demonetisation effects will not last long, but as far as short-term challenges are concerned, it is quite evident by now that there is hardly any industry in the country that has remained unaffected by the demonetisation move. From vegetable vendors to jewellery shops, every entity is feeling the pinch. Retail as well as wholesale trade have come down. Labor-intensive sectors are finding it difficult to pay workers' wages and procure raw materials. Industries like real estate, automobiles, white goods and electronic items are anticipating sharp demand slowdown in the coming months.

Having said that, I don't see any significant risk facing the economy as a result of the demonetisation scheme, but the Centre must step in now to prevent any such risk from creeping into the economy. Recently, an industry body has viewed that the Centre should ramp up public expenditure in order to partly limit the major impact. Also, steps should be taken to revive fixed investments and capital goods production. At the same time, I think it is high time to cut interest rates. Additionally, individual attention should be paid to every single sector to ensure that the demonetisation move could not take the wind out of the Indian industry's sails for an indefinitely longer time.

I invite your opinions.