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Growth takes a back seat

Growth takes a back seat
Entering its third fiscal year, the Modi Government has been at pains to demonstrate its undiminished reforming zeal and cataloguing a whole range of policy endeavours of last two years in several directions to lift up a still stagnant economy awaiting signals of revival at the start of the new fiscal year (2016-17).

At a Business Summit on March 28, Prime Minister Narendra Modi responded to a palpable sense of disappointment, especially among foreign investors, let alone the aspiring masses at home, that reform and growth-job record had not risen to developmental expectations Modi himself had raised before and after the Lok Sabha elections which catapulted him to power in 2014.

He, therefore, set out a coherent framework of policy and administrative reforms his government had embarked upon to stabilise the economy and sustain growth and promote development with job creation. But many of them, by their nature, such as infrastructure building with public investment may not produce results in the near future.

And in the absence of domestic private investment so far, Government's reliance on foreign capital has been growing higher with FDI liberalisations to the maximum for both infrastructural investments like "Smart Cities" as well as in manufacture for the "Make in India" and, what is more and "thrilling" for Modi is increases in FDI flows into rural sectors - fertilisers, sugar, agricultural machinery and food processing, providing linkages for the rural economy.

There is no doubt that 2015-16 saw a significant rise in FDI flows into the economy, compared to the previous year, especially in construction activities, computer software and hardware, and automobile industry which, the Prime Minister noted, was concrete evidence that the "Make in India" policy was having effect in employment intensive sectors.

Modi cites global recognition of India being one of the world economy’s brightest spots. True, but his assertion of current trends of low levels of inflation and current account deficit, and a “high rate of growth" resulted from "good policy, not good fortune" needs to be put in perspective.

The Modi Government came into office in 2014 at a time of sharp downturn in international commodity prices, notably oil, as a result of both a surge in supply including from new sources like USA and weakening of demand hit by the global slowdown, especially in China, the largest user of fossil fuel.

According to IMF estimates, since mid-2014, oil prices had dropped about 65 percent in dollar terms or about 70 dollars a barrel, as growth slowed down across a broad range of countries. It was a boon for India heavily dependent on imports to the extent of over 70 percent of its oil requirements. It helped to lower fuel inflation and facilitated solid cuts in oil subsidies for POL.

The resulting improvement in Government finances was one of the principal factors that helped Finance Minister Arun Jaitley to meet his fiscal deficit target of 3.9 percent of GDP in 2015/16 and remain credible. With continuing low oil prices into 2016, Jaitley has also been able to target a significantly lower deficit at 3.5 percent of GDP in fiscal 2017 beginning April 1.

No wonder, Jaitley hopes for a rate cut by the Reserve Bank of India on April 5, when the Central Bank comes out with its first bi-monthly policy review in 2016/17 buttressing his argument with a mindless reduction of small savings rates showing little concern for low-income groups and senior citizens.

Lower oil import prices coupled with non-oil import slowdown reduced trade deficits and eased the current account imbalance, limiting deficit to below 2 percent of GDP. Governor Raghuram Rajan has steered the central bank's monetary policy with a great degree of success in lowering CPI and in managing the exchange rate averting spillover effects from global market turmoils.

India ended fiscal 2016 with a record 355.539 billion dollars in foreign exchange reserves, the year ending with a net addition of around 14 billion dollars, aided by higher investment flows, despite portfolio outflows from time to time. But the harder part of economic management is in the hands of the Finance Minister and other policy-makers in Government. An assessment of the economic trends and outlook is awaited from Dr. Rajan on April 5.

Given the current global slowdown, and, in particular, China's ongoing transition from investment-led to consumption-led growth and the travails it is going through even to keep its economy growing at a subdued 6.5 percent growth, 2016 will remain a difficult year for the world economy, and equally for India.

The Asian Development Bank has projected a slowdown across the region but global headwinds notwithstanding, it says developing Asia would contribute 60 percent of world growth. India’s economy will see a slight dip in growth in 2016/17 to 7.4 per cent from an estimated 7.6 percent in 2015/16.

The economy will again accelerate in 2017/18 to 7.8 per cent "as the benefits of banking sector reforms and an expected pickup in private investment begin to flow", ADB said in its Development Outlook 2016. “India is one of the fastest growing large economies in the world and will likely remain so in the near term,” said Shang-Jin Wei, ADB’s Chief Economist. India’s potential growth can rise if it can successfully implement necessary reforms including unifying the tax regime, improving labor market regulations, and further opening for foreign direct investment and trade. 

The fact remains for three years at a stretch ending March 2016, growth ranged from around 7 to 7.5 percent.

The Union Budget has also based its fiscal projections on a modest growth of 11 percent at current prices, which in real terms be around 7.5 percent. Growth even at current levels would have to be sustained largely through public investment and an expected rise in domestic consumption due to impending salary hike for central government employees.

In any case, a greater part of public spending in 2016 would be designed for rural infrastructure and on-farm improvements as the ruling BJP prepares its winning strategy for the UP elections in 2017, with its commitment to double farmers’ incomes within five years. IPA

(The author is a commentator on economic affairs. The views expressed are strictly personal.)
S Sethuraman

S Sethuraman

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