There is a slowdown. There is no slowdown: Key govt officials speak in different voices

There is no clarity from government officials on the impact of a slowdown or whether there exists a darkening economic backdrop. A solution in the form of a stimulus or a series of actions seem out of reach as key stakeholders of the government seem to be on different pages.

The confusion has only heightened in recent days as government officials have given different views on support, action and the outlook itself.

Investors typically look for clear signals from authorities when they are expected to counter a slowing economy and calm volatile markets.

For starters, confusion reigns on the severity of the economic gloom.

Subhash Chandra Garg, power secretary, said there is no recession globally.  “Today, the global economy still is growing at about 2.9 percent to 3 percent,” said Garg, former economic affairs secretary.  “Last two years, we grew at about 3.5 to 3.6 percent globally … in that context this is little bit of a slowdown but if you take four years before that, the average growth was only 2.4 to 2.5 percent. So this year’s growth globally would be higher than the growth of six-seven years taken together as an average.”

In contrast, Rajiv Kumar, vice-chairman of government think-tank NITI Aayog’s said he has never seen the financial sector in a situation like this before. “This is an unprecedented situation for a government of India from the last 70 years. We have not faced this sort of a liquidity situation where the entire financial sector is up in a churn and nobody is trusting anybody else. It is not just the government and the private sector, within the private sector nobody wants to lend to anybody else,” he said.

RBI governor Shaktikanta Das agreed. “There is clear evidence of domestic demand slowing down further. Investment activity has been losing traction. The weakening of the global economy in the face of intensifying trade and geo-political tensions has severely impacted India’s exports, which may further impact investment activity, going forward. Private consumption, which has been the mainstay of domestic demand, has also decelerated.”

Clarity is also lacking on whether the economy will be protected with infusions of cash.

Piyush Goyal, commerce and industry minister, said fiscal stimulus was a good idea but cautioned that the government was committed to staying on the path of fiscal prudence. Addressing an investor conference on Wednesday, Goyal acknowledged that investors are concerned due to an “announce first, think later” policy of the government, but insisted that authorities are acting to address issues.

Garg has frowned on stimulus from the government. He said a stimulus can lead to additional government borrowing, which will stall the transmission of rate cuts by the Reserve Bank of India. He said a better way to support the industry was to bring down the rate of interest and make the credit grow to businesses. “That is a much better way to my mind to stimulus versus a fiscal stimulus,” Garg said at an panel discussion on the economy on Thursday.

Garg’s views were echoed by chief economic advisor (CEA) Krishnamurthy Subramanian. “If we expect the government to use taxpayer money to intervene every time when there are some sunset, then you introduce possible moral hazard from too big to fail and as well as the possibility of a situation where profits are private and losses are socialised, which is basically completely anathema to the way a market economy works,” he said at an investor summit on Thursday.

But a counter view came from Kumar of NITI Aayog. He called for “out of the ordinary” steps to tackle the gloom.

NITI Aayog also proposed a multi-pronged strategy to revive the ailing economy, including a reduction in the interest rate from 8 percent to 5 percent on new small savings, according to people familiar with the matter.

Does that mean there is hope for businesses?

Goyal, the minister, said NITI Aayog’s comments don’t reflect the government’s view. He was specifically referring to the think-tank’s proposals on the automobile sector’s transition to electric vehicles, which  has come under a firestorm of criticism from the industry.

Goyal’s comments also come in the backdrop of the labour arm of the RSS, Bharatiya Mazdoor Sangh (BMS), blaming Niti Aayog for killing jobs and sale of government assets.

RSS is the fount of the ruling BJP.

No doubt, solutions are not easy. RBI cannot continue to cut interest rates for fear of robbing themselves of the ammunition it would need later to fight a recession.

The government is burdened with a severe fiscal dilemma. Tax collections have been affected by the economic slowdown and it cannot be lavish with spending for fear of breaching the fiscal deficit target and how it cannot boost growth due to the spending constraints. In other words, it cannot cut taxes or pour money into bridges, roads and other public works projects.

But investors expect some clarity from the government. Or at the very least, if government officials speak the same voice.