China slowdown offers opportunity
The global economy is not looking good in the face of market turmoil in China. A global recession triggered by the poor show of the European economy had badly hit the export-led growth model of China, whose economy grew by 6.9 percent in 2015—the slowest in two decades. Following this slowdown, high commodity prices had started correcting, exerting more pressure on China. The dragon nation’s massive over investment in steel, cement, shipbuilding, petrochemicals, real estate and other infrastructure sectors began to burst. This volatility in equity and commodity markets did not augur well for the global and Chinese economies. The global economy may not be in a crisis as in 2008 during the financial meltdown, but it is certainly not out of the woods and outlook for the global economy is certainly bearish in 2016.
In such a scenario, there will certainly be some ripple effect on India. Fortunately, there will be no nasty effects as is happening elsewhere around the world. It is because India is now a reviving economy with strong fundamentals. The current account deficit is below one percent of GDP; inflation is down though there is some increase in food inflation lately, and our foreign exchange reserve levels are comfortable and swelling. The fiscal deficit has been reined in within manageable limit of less than four percent. In fact, it is falling further partly because of the sharp fall in commodity prices particularly oil, which has drastically pushed down India’s subsidy bill. It has also helped in increasing indirect tax revenue because of the increase in excise duty to the pre-crisis level.
This is the time for India to get its act together. Exuding confidence on the Indian Economy at the WEF summit in Davos, Jaitley said India would utilise the headroom available to get some additional growth engines going through efforts to revive private investments.
Several speakers at the ongoing Davos Summit have stressed that India will be the next growth engine of the World. It is not very good for China, Europe and the US as well. Reserve Bank of India Governor Raghuram Rajan summed up India’s comfortable situation. He termed India as a recovering economy, despite weak global markets and two consecutive years of poor rain. As these things turn around, growth will get stronger, he said. When the growth rate is falling elsewhere in the World, India is increasingly becoming the fastest growing economy in the world. Of course, India is growing to its potential as yet at 9-10 percent annually. For that to happen, India needs to kick-start investments in infrastructure with serious participation by the private sector. The fall in commodity prices will help in pushing investments in infrastructure as input costs in steel and cement, among others, will come down substantially.
The General Budget to be presented to Parliament by Jaitley on February 29 provides an opportunity to push reforms. The aim of these reforms is to get its house to convert the global challenges to opportunity and take the Indian economy to new high. This is a golden opportunity for India to become an economic power. We had a similar opportunity in 2004-05 and we missed the bus. I hope we do not miss the bus this time. If we get it right, this time, the 21st century would belong to India. Moreover, India has the demographic dividend with 65 percent of its population below the age of 35 years. The country is geared to cash in on this once in a lifetime opportunity. The general budget, particularly game-changing tax reforms like GST, bankruptcy law, make in India hold the key.
So far India has not been able to grow to its potential barring 2004-08 when the economy clocked nearly a double-digit annual growth. One of the major reasons for growing to our potential is corruption at all levels right from the top to bottom. This is a menace that is deep-rooted in the country and Prime Minister Narendra Modi showed a lot of promise to end this menace when he secured a majority in Lok Sabha elections in 2014, the first time any party has done in the last 30 years. But so far there is no visible effort to end this corruption menace so as to ensure the economy marched ahead.
(The views expressed are strictly personal)