GST tax cuts along with specific incentives for export-oriented industries, particularly in the manufacturing sector, and strategic trade pacts have been prescribed by economists to end the phase of Stagflation which is currently plaguing the economy.
At present, economists have said that India is facing Stagflation — an economic trend marked by rising inflation and falling GDP growth.
As per the latest macro-economic indicators, subdued consumption trends, along with a massive contraction in manufacturing, agriculture and mining activities, pulled India’s GDP growth rate down to 4.5 percent in the second quarter of 2019-20.
This is the slowest GDP growth rate is around six years. The growth on a year-on-year basis during Q2 2018-19 had risen to 7 percent.
Economy watchers have blamed subdued demand, high taxation, low job creation, stagnant wages and stressed rural sectors for creating the economic slowdown.
Already, sectors such as automobiles, consumer durables, and capital goods have come under heavy pressure due to the slowdown.
Furthermore, the slow growth rate along with the rise in retail inflation due to high food prices, especially those of vegetables and pulses, led to the phase of Stagflation.
Economists told IANS that measures such as direct and GST tax cuts and strategic trade pacts with the US and the UK will help in ending this economic phase.
“The reduction in the corporate tax rate is an important measure, but much more action is needed to augment private consumption and investment. There is not much fiscal space for spending at the Central level and the states too are constrained by lower tax devolution by the Centre due to low growth in central revenues,” M. Govinda Rao, Chief Economic Advisor, Brickwork Ratings, told IANS.
“The most important action needed now is to fast-track the disinvestment and use the proceeds to augment capital spending. It is also desirable for the government to report the pending payments and off-budget borrowings to show a realistic and transparent picture and then to provide a road map laying down the correct path,” Rao added.
Besides, the problem of credit and business confidence and overall financial stability needs to be looked at by the government, said Edelweiss Securities’ Economist Madhavi Arora.
“While there is a need for more dynamism in managing the NBFC stress, issues like elevated ‘term premia’ and ‘credit premia’ will continue to constrain long term funding, which remains the driving factor for economic activities and addition of new investment stock,” She said.
According to Acute Ratings and Research’s Lead Economist Karan Mehrishi: “The revival of domestic demand is the key to offset Stagflationary pressures. The government needs to consider specific fiscal measures that can incentivise domestic consumption, given that the effectiveness of further monetary measures at this stage is limited.
“If there is a rapid revival of demand along with continuing public investments, it shall restart the virtuous cycle of private sector investments, accelerated employment, and stronger demand.”