Former Reserve Bank of India Governor Raghuram Rajan said that India was in the middle of a “growth recession” as there was significant distress in rural economy. Latest government figures showed that Gross Domestic Product had contracted to 4.5% in the July-September quarter – the slowest growth rate in more than six years, and the sixth straight quarter of slowdown.

“With the stress in the financial sector, monetary policy has limited effectiveness,” Rajan said in an essay titled “How to fix the economy” in India Today magazine. “On the fiscal side, recent corporate tax cuts, which were a short-term boost to stock prices, may not deliver much-needed business investment when there are so many other impediments.”

“While growth-boosting reforms are being put in place, scarce fiscal resources are perhaps best targeted toward supporting the rural poor-for instance, by bolstering the NREGA programme and by funding rural road construction,” he added.

He added: “Recent proposals to boost bank deposit insurance to Rs 5 lakh per individual, while popular, will mean an enormous liability. The costs will be seen when weak cooperative banks, that will gain more deposits as insurance limits are boosted, fail. Instead, deposit insurance should be raised only in parallel with improvements in the governance and regulation of the cooperative sector.”

Several sectors in deep trouble

Rajan also said India’s real estate sector and the construction and infrastructure industries were in deep trouble, Bloomberg reported on Saturday. Rajan added that the central bank must carry out an asset quality review of non-banking finance companies, which lend money to these sectors.

The former RBI governor said Hindu nationalism incites social tensions as well as hampers the country’s economic growth. “Instead of building gigantic statues to national or religious heroes, India should build more modern schools and universities that will open its children’s minds, making them more tolerant and respectful of one another, and helping them hold their own in the competitive globalised world of tomorrow,” Rajan wrote.

“There is a tendency for those in power to want more control, and this government is no exception, especially given the social and political agenda it is focused on,” Rajan wrote, adding that majoritarianism was gaining popularity across the world. “Apart from fomenting social tension, which India can ill afford, Hindu nationalism will detract from economic growth-which will exacerbate social tension further.”

The Modi government was trying to “bulldoze its way” by misusing its investigating agencies, Rajan said, adding that this will intimidate those with valuable criticism and “paralyse its own officials who fear similar actions by future governments and business wary about long-term investment”. It is professional to not let investigating agencies go on fishing expeditions, he wrote. “They should certainly not give the impression that they are being used for political retribution.”

The economic slowdown

According to the latest figures, the agriculture sector grew 2.1% in the second quarter, compared to 2% in the one before, while growth in mining contracted from 2.7% to 0.1%. Manufacturing contracted 1% compared to a 0.6% growth in the first quarter. Electricity and other public utilities grew 3.6% as against 8.6% in the April-June quarter. The output of eight core industries last month declined 5.8% compared to October 2018.

The slowdown has been predicted by most agencies and world bodies. Last week, American credit rating agency Fitch Ratings’ company India Ratings and Research revised its growth forecast for India in the 2019-’20 financial year to 5.6%. In October, the International Monetary Fund had lowered India’s projected growth in the current financial year to 6.1% but said it would rebound to 7% in the 2020-’21 financial year. The United Nations Conference on Trade and Development, in its September report, said the country’s economic growth was expected to slow down to just 6% in 2019 from 7.4% the previous year.

In August, credit rating agency Moody’s Investors Service had downgraded the country’s projected GDP growth rate to 6.2% for 2019-’20. The Asian Development Bank in September slashed its projection for the country’s economic growth in the ongoing fiscal year from 7% to 6.5%, but said the economy would remain one of the fastest-growing in the world this year as well as the next.

In May, the government had released a report by the National Sample Survey Organisation that showed that India’s unemployment rate rose to a 45-year high of 6.1% in 2017-’18. Another survey showed that the monthly per capita consumption expenditure has declined for the first time in 2017-’18 since the 1970s.