Growth, jobs likely to remain elusive

It is no fault of the Modi Government that its overall performance in the first two years on the economic front has remained less productive, given the numerous challenges of stabilising the fundamentals for growth and jobs. Irrespective of the beguiling assertions from its economic chieftain, Finance Minister Arun Jaitley, the overall picture remains a little bleak.

The pause in corporate investment revival is as yet unbroken. Not that policies, mostly designed to ease doing business and ensure fiscal prudence, have not been in the making. But quite a chunk of unresolved legacy issues (whether long-delayed projects awaiting clearance or tax policy issues, somewhat messed up in Jaitley era as well) may be one major factor inhibiting investors.

Growth has stayed put at a little over 7 percent. Ambitions for 8-9 percent growth have not gained any traction. In its first two years, the NDA government has had a windfall in the steep fall in international oil prices, which helped to lower inflation, reduce fuel subsidy and facilitate containing fiscal deficit at 3.9 percent of GDP in fiscal 2016. The current account deficit also hovered below a manageable 2 percent of GDP.

The Central bank, for its part, substantially eased monetary policy in this period by 150 basis points. But what is ominous for the outlook, going forward, is certainly the steady weakening of global growth and slowed-down trade flows - India being one of the worst performers on exports not entirely due to global factors – and even more, the asset market turmoils further adding to the negativity for highly leveraged corporates to usher in long-awaited investment revival.

It is in this context that RBI Governor Dr Raghuram Rajan, while appraising favourably government’s policies thus far, has emphasised that even though policies in the rest of the world could enhance uncertainty for emerging markets - US Fed is likely to affect second rate rise in June - India was much better prepared for global volatility.

Dr Rajan attributed this to measures taken by the government and the Central bank since the “taper tantrum” in summer of 2013. Thus, be it noted,  Modi came to power in conditions of relative stability in financial markets. But global uncertainties since have posed challenges that emerging markets like India should focus on—macro stabilisation, building buffers, and reducing vulnerabilities.

India has a comfortable reserve cushion of some 360 billion dollars which helps to limit external vulnerabilities including intervention in foreign exchange market when called for and to withstand any sudden stop in capital inflows. Dr Rajan feels India needs to continue to take “sensible measures” in these uncertain times without getting “too ambitious” on growth.

At the domestic level, there are high expectations of a strong growth rebound closer to 8 percent from a good monsoon forecast for 2016. Low oil prices are also likely to provide comfort for government finance with Jaitley being able to limit fiscal deficit to the budgeted 3.5 percent of GDP.

Fiscal prudence, however, takes precedence over growth beyond the projected 7.5 percent in 2016-17, which itself will not be a smooth ride, even if monsoon does turn out to be as favourable as forecast in 2016 until the mess in the financial sector begins to be cleared substantially.

Meanwhile, the unforeseen dimensions of drought gripping central, western, and northern regions of the country have come into bold relief commanding urgent attention. The drought and acute water scarcity have triggered desperate calls for Central assistance, as Prime Minister Narendra Modi took stock of the magnitude of distress with state Chief Ministers.

Studies show that the national economy could take a major hit in the current year on account of the drought affecting over 300 million people and its impact on the lives of the farmers likely to linger for months. It remains to be seen how far the Centre, with its concept of “cooperative federalism” measures up to states’ demands for assistance, a call buttressed by a direction from the apex court to the Centre to make a national disaster response. 

At the start of the third year of Modi Government, unfinished “structural” reforms apart, macroeconomic stability is far from assured with the upswing in CPI, especially the food price index, getting out of line with projected disinflationary course and perhaps interrupting momentarily the steady monetary easing of RBI over the last 16 months. The next bi-monthly monetary policy review is due in June.

The bigger challenge in the financial sector is undoubtedly the mess in the banking system with non-performing assets rising to Rs. 3.6 lakh crore by end-December 2015. The government has certainly made some moves like setting up of the Bank Board Bureau to work out “intermediate mechanisms” to alleviate the distress and provide some comfort to decision-making in banks. RBI has set a tough target of cleaning up of the balance-sheets by March 2017.

But, politically, despite all the electoral triumphs paraded by the majoritarian BJP since 2014, it has been struggling to usher in “structural reforms”-- indeed, these are considered politically difficult even in advanced economies for increasing competition in services and for greater labour market flexibility.

Add to it the “Congress-mukt” approach the ruling dispensation persists in, to rule out any consensus-building with the main opposition in Rajya Sabha to get on with the highly-touted GST which is supposed to usher in a new era of business and lift GDP growth to 8 to 9 percent. Rather than any conciliatory approach, the majoritarian assertiveness in denouncing Congress “obstructionism” will not wash. The Rajya Sabha had in the Budget session passed key legislation including one on mining reform, on regulation of the real estate sector, Aadhar, and bankruptcy and insolvency code.

Jaitley wants the judiciary to draw its own “Lakshman Rekha” so as not to “substitute” for executive actions but it is mainly the lapses of the Modi Government in constitutional governance that go up to the attention of the apex court.  

The two years of Modi regime have seen such a weakening of institutions, threats to civil society organisations and frenzied pursuit of a divisive ultra-national agenda that perhaps the Prime Minister himself feels we should go in for fifteen-year development  plans for transformational impact. He will do well to keep the planned celebrations of “achievements” at a subdued level, given the challenges – economic, political, and strategic–that he has to confront over the next three years. 

(The views expressed are strictly personal.)