Amidst unabated grimness in global economic and trade slowdowns, India still maintains the nominal lead in economic growth — 7 to 7.5 percent for three years now. But it is still under-performing on a range of policies and structural reforms. So much so that its much sought-after upgrade from the credit-rating agency, Moody's, remains elusive at present. One can see how desperately the Finance Minister Mr Arun Jaitley is moving on several fronts - GST, bringing forward a combined general and railway budget by Feb 1, and nudging banks to get aggressive in lending to help revive stalled private investments, besides the usual tax collection drives.
And, even with a new Governor at the Central bank, Mr Jaitley has not desisted from proffering advice. "RBI will keep low inflation in mind while deciding rates," he said on October 4. Helpfully, though, the US Fed has deferred its expected hike in Federal Funds Rate till the end of the year as it awaits more evidence of strengthening in US economy, slated to grow at only 1.4 percent this year.
Behind all these, the anxiety is apparent on the Finance Minister being able to adhere to the budgeted 3.5 percent of GDP as the fiscal deficit in 2016-2017. Hence, the stepped-up efforts with instant Cabinet approvals on substantial disinvestment in public undertakings, closure of loss-making ones and trimming of activities of enterprises which fare poorly with other competing private businesses.
It would not come as a surprise if Mr Jaitley resorts to "re-arranging public expenditures" which even at present do not take care of the required degree of recapitalisation of public sector banks with their mounting non-performing assets or the social spending adequate enough to provide a semblance of “inclusive growth”. His expectations are that GST would augment revenues, along with railways being taken over in the central budget (with inescapable tariff changes from time to time), and give him greater cushion in the next fiscal year he would budget on February 1, even if the countrywide single tax regime gets pushed to October 1, 2017.
Meanwhile, the focus will be on how to boost revenues in the current year for not only meeting the fiscal deficit target but also the budgeted public investment. The much talked-of strategic disinvestment would come into play as the economy enters the second half of Fiscal 2017 with greater expectations on demand, consumption, growth and revenues. The government intends to move into a tight schedule with the hope of some redemption for all its trumpeting claims like a post-monsoon growth uplift emerging, inflation it had "conquered" being subdued, and the execution of the biggest economic reform since Independence (GST).
And GST has still to cross several hurdles with rates, to begin with, and securing the states' accord on key issues and making them equal partners for this huge revenue-raising undertaking with both its gainers and losers. Compensation for the latter is also yet to be firmed up. Finance Minister Mr Arun Jaitley wants the two Central enactments on GST done in the forthcoming Winter Session of Parliament.
On Railways, the Minister Mr Suresh Prabhu may claim the budgets being combed as the "biggest reform" , but past railway ministers see it as not only an end to the financial autonomy of the country's largest public undertaking but also a move towards privatisation, even in parts.
True, Railways are rid of liabilities on capital-at-charge and dividends but how far the so-called reform would advance new projects and finance future development of the country's transport lifeline would remain uncertain over time, given the state of country’s finances. Mr Prabhu would look to improving the performance of passenger and freight trains and could show some results.
In its September Update of Economic Outlook, OECD says India would continue to grow "robustly by 7.4 percent in 2016 and 7.5 percent in 2017. This is on the assumption of demand emerging from the large wage increases under the 7th pay commission and continuing decline in inflation. OECD sees "little room" for further rate cuts, given the inflation expectations. It holds the view that monetary policy is over-burdened in advanced and emerging economies generally.
Also, OECD has called for improving the quality in fiscal consolidation by increasing tax revenue (for which Mr Jaitley is leaving no stone unturned) and tilting spending more toward physical and social infrastructure. There is also an urgency to create quality jobs for promoting inclusive growth but this requires modernising labour laws and improving productivity, it notes. The state of world economy remains fragile and global growth in 2016 is estimated at around 3 percent and what is of greater concern is a further decline in the rate of volume growth in world trade which has halved relative to the pre-crisis period.
The trade outlook is depressing for India inasmuch as the slowdown is concentrated in Asia. While low investment has played a role, rebalancing in China and reversal in the development of global value chains could signal permanently lower trade growth, leading to weaker productivity growth, according to OECD. While weak demand is the key factor, a lack of political support for trade policies, whose benefits could be widely shared, is of "deep concern", it said.
In its annual Trade and Development Report, UNCTAD argues that economic slowdown in the advanced economies is the biggest drag on global growth, but developing countries are now caught in the downdraft. Getting the world economy back on track requires that global leaders use bolder macroeconomic policies, strengthened regulation of finance and active industrial policies. Developing Asia remains the fastest growing region, with an expected growth rate similar to that of 2015, of around 5 percent. "China and India may escape the worst of the adverse external environment due to their expanding domestic market".
Thanks to increased trade deficit, with declines in imports besides exports, India's current account deficit further narrowed to US$ 0.3 billion (0.1 percent of GDP) in Q1 of 2016-17, significantly lower than US$ 6.1 billion (1.2 percent of GDP) in Q1 of 2015-16. UNCTAD puts India's growth in 2016 at 7.5 percent and expects solid growth performance through 2017. Despite the Finance Ministry’s assertions of India being the world’s fastest-growing economy, in seeking higher rating, Moody’s has said an upgrade in India's investment rating would hinge on faster fiscal consolidation, reduction of debt-GDP ratio, and addressing infrastructure challenges. While viewing the ongoing developments positively, Moody's has said it could upgrade rating in one or two years if it is convinced the reforms
are "tangible". IPA
(Views expressed are strictly personal.)