The second volume of the Economic Survey 2016-17, presented in Parliament by the government on August 11, hinted at a "gathering anxiety about near-term deflationary impulses". Five days later, the Monetary Policy Committee (MPC) of the Reserve Bank of India noted that a "conclusive segregation" of the factors, which are driving the "disinflation", was still elusive.
Both observations, shorn of all clutter and jargon, are simply telling us that the Indian economy is staring at a slowdown; at least it is a near-term reality. For the country to bounce back or gather its full growth momentum, it needs to overcome several hurdles, some of which could be quite elusive and may require greater attention.
The assessment of the MPC is fairly comprehensive. It has highlighted the continued weakness in terms of industrial performance and subdued demand for consumer durables and capital goods. That new investments have hit a 12-year-low and many stalled projects could not be revived are evidence enough that a slowdown is upon us. Low inflation rates and the appreciation of rupee have further contributed to the current deflationary trends.
The Economic Survey's diagnosis has several overlapping observations, but its focus is on stressed farm revenues, fiscal tightening by the states to compensate for possible farm loan waivers, declining profitability in sectors such as power and telecom, and transitional frictions arising out of the Goods and Services Tax (GST) implementation.
But the Survey and the MPC have captured positive signals as well. The government's optimism, expressed through the Survey, stems from the launch of the GST, the ongoing activities to address the stressed asset challenge affecting both companies and their lender banks, and the belief that the growing financial market confidence (as evident from the rising valuations of bonds and stocks) is an indication of India's inherent macroeconomic stability. Apart from GST, any improvement in external demand situation (export growth), monsoon-led agricultural growth and significant growth in the government's spend towards infrastructure are also seen as positive developments by the MPC.
It is just that the positive signs may not be good enough to neutralise the factors that indicate a slowdown. At least that is what the experts are saying.
For some time now, the Ministry of Finance and the Reserve Bank of India have been in disagreement when it comes to the country's monetary policy. While the MPC is concerned about the role of the monetary policy in inflation control, the Finance Ministry has been demanding interest rate cuts to make credit cheap for the industry and the consumer to trigger faster growth.
The Survey also notes that over the past two years, India's real GDP growth - 7.5 per cent on an average - had no parallel in the recent history of emerging market economies because the growth was against the context of weak investment, export volume and credit growth - all the signals that suggest an economic slowdown.
Could India continue to beat it and grow even more?
The Survey says while the current configuration is certainly unprecedented in cross-country experience, sustaining the current growth trajectory will require action on more normal drivers of growth such as investment and exports, and cleaning up of balance sheets to facilitate credit growth. Hence, it is not surprising that the Survey states that the government should counter the deflationary impulses through key monetary, fiscal and agricultural policies.
The slowdown is real, but the question is how to tackle it and how quickly? The answer remains elusive.