Millennium Post

More clarity please, Modi

The Modi government strangely seems to have settled for a somewhat slow motion in re-energising economic growth, belying the expectations of dynamic performance for a stable government which had instilled business confidence. It may well have had some impact in the political backlash within four months for the ruling party, BJP, as reflected in the recent assembly byelections.

All economic signals are still of a mixed character in the second quarter (July-September) so that without a momentum, the economy cannot hit even the modest 5.5 per cent growth in fiscal 15. That means government has to step up the momentum for growth.

This is not to under-rate all its future plans being unfolded for smart cities, high-speed railways, industrial parks, and other infrastructure and the more basic drive for sanitation. There are no precise estimates of costs or time-lines in most cases.

Maybe, as ‘creative destruction’, Prime Minister Narendra Modi had announced with fanfare on 15 August the abolition of the Planning Commission. His advisers may be mulling over on what would be a substitute for the intended objectives. Meanwhile, social and other programmes of the late government are being refurbished and launched. But what is needed for the immediate is a drive to get public and private investment, even if limited, on track to re-boot the growth engine, instead of letting things drift, and also get a tight hold on prices. Inflation, WPI, in particular may seem moderating to 3.74 per cent in August, but it need not be a steady downtrend, going by data of previous years.

The ruling party, BJP, has made dubious claims on both GDP and inflation - that the 5.7 per cent economic growth in the First Quarter (April-June) was due to the Modi government, which assumed office only in late May. It sought to overlook the lagged effects of correctives in fiscal and current account balances made by UPA government during 2013/14 as well as several project clearances.

Equally, moderation in WPI inflation and CPI edging downward is attributed to the Modi government steps which mainly related to telling states to deal sternly with hoarding of grains etc, But the CPI softening marginally is a result of seasonal fall in vegetable prices. The ‘base effect’ for price indices cannot be left out of account.

Overall, Modi, in whom all the authority is vested, is heavily engaged in extended summit diplomacy over three to four months. These are designed to strengthen India’s structural transformation and raise the level of its strategic role in Asia and the world at large.

The huge investments in infrastructure that are being mentioned in the Sino-Japanese rivalry for India’s strategic alignment are mostly for the long haul. Our dependence on such capital flows from abroad gets underlined in the process but in reality, wisely deployed, Japanese or Chinese investments should all help build world class infrastructure that India sorely needs to be reckoned among global powers. Modi, even while navigating the course of bilateral diplomacy, needs to demonstrate greater policy clarity as well as provide a reform push in both real and financial sectors, to restore pre-crisis growth trends.

In the light of the bitter experience of recent days, caution may still prevail, with more electioneering days ahead for the prized states of Maharashtra and Haryana.

On the inflation front, RBI Governor Raghuram Rajan has taken the wind out of sails with his ruling out a repo rate reduction, in the run-up to his Fourth Bi-Monthly Policy Statement due on 30 September. It is not warranted yet, if one looks closely at the sectoral indices, though it may be that the pace of inflation has slowed down.

Every time there is a change in WPI or CPI rate based on index number, news headlines talk of inflation ‘falling’ but for all the falls so far, retail prices at market level do not change for the better for the consumer. It only helps the corporate sector, with muffled backing from finance ministry, to urge RBI to ease policy by cutting rates.

Rajan’s point is that prices across the board have to come down, and ‘there is no point in cutting interest states to see inflation picking up again’. Not only food prices that are persistently high, even non-food items remain elevated.

At a businessmen’s seminar, when pressed on rate cut, Rajan said if they brought down prices of different items, he would bring down interest rates. Reduction would be feasible when ‘we have won the fight’ against inflation.

CPI had no doubt declined to 7.8 per cent in August but it can be attributed to a high base of 19.17 per cent in the same month last year, as analysts noted. Risks to food inflation still persist because of a weak and uneven monsoon this year.

On domestic economy, Rajan agrees ‘we are in the process of picking up growth, even if the journey is likely to be bumpy at times. Inflation is coming down consistent with our forecasts (of eight per cent by January 2015 and six per cent by January 2016)’.

India’s growth is projected by OECD at 5.7 per cent in 2014 and 5.9 per cent in 2015, relying on the Modi Government’s commitment to growth-oriented reform. But since inflation remains above target, monetary policy will ‘need to remain restrictive’ OECD said in its September Global Update, It has also urged improving the quality of fiscal consolidation, with a reduction in subsidies and a shift in expenditure to social and physical infrastructure and tax simplification to remove a brake on investment. IPA
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