Millennium Post

Need for a quick fix!

India’s GDP grew by 4.6 per cent in the first half of fiscal 2014, with a projected five per cent for the full year based on whatever strength derived from agriculture, thanks to a good monsoon, and a pick-up in segments of infrastructure like electricity generation and construction as well as exports.

The story remains that neither investment, public or private, nor consumption has so far revived to an extent as to make an impact for sustainable growth taking hold before the fiscal year runs out. There is a virtual stagnation in industrial growth. Now it is a matter of doubt whether investments would have picked up in fiscal 2014-2015, which is widely seen as a year of transition in India with, as of now, unpredictable consequences for the polity and the economy. The second quarter (July-September) growth at 4.8 per cent, improving on the 4.4 per cent in the first quarter – though below 5.2 per cent in the corresponding quarter of fiscal 2013 – has been welcomed by analysts as a positive but not as one signalling the start of a firm recovery. So far, both government and RBI rely on a better second half from the kharif harvests and rabi crop assumptions, along with marginal improvements in project outturn and in service sector overall.

Officially, a five per cent growth in fiscal 2014 has become respectable and that too with all the ‘green shoots’ which are only visible to the finance minister. Perhaps government still hopes that it would be exceeded by a couple of decimal points. Even if there is some revival of private investment, most unlikely amid election-eve uncertainties, it could get reflected in the following year. More than an economic rebound, government remains focused on proving to global investors and firms that it has held down fiscal deficit to the committed 4.8 per cent of GDP, and also ensuring that the current account deficit is not allowed above three per cent of GDP.  The finance minister is unperturbed by fiscal deficit running above 8.4 per cent in the first seven months (April-October) nor is bothered at all about rising trend in wholesale and consumer inflation.

‘There are no quick fixes’ for bringing down food inflation, Chidambaram contends even as he maintains the stress in the Indian economy is like the slowdown the world over. Such misleading generalisations in Government circles are sought to be made to cover up past policy paralysis or neglect. The fact that the reforms and opening up policies announced after the wake-up in September 2012 are yet to produce visible results is also ignored. True. The reactivated process for clearance of large investment projects during 2013 - with over 100 of them said to have been already given approval with costs totalling 57 billion dollars - may begin to become operative gradually and in stages, depending again on inputs and financing issues. These could get reflected on economic output from 2014-2015 onwards, if there are no further uncertainties. Chidambaram has spoken of a large agenda over the next six months, mostly reforms to liberalise capital market and financial sector and also decisions on fixing prices of natural gas and oil and what looks like the irremediable coal sector issues. With these done, he would prepare India to get back to high growth trajectory, six per cent in fiscal 2015, seven per cent in fiscal 2016 and eight per cent in 2017-2018.

Chidambaram should not be grudged at present for his confidence of return post-election to further the ambitious agenda of liberalisation to put the economy on a sustained 8-9 per cent growth path.

Underlying these assumptions are that the country would be attracting substantial capital inflows on the basis of restored macro-economic balance as well as fuelling large domestic investments by the corporate sector and expansion of financial and other services. The finance minister’s immediate tasks, even as he has begun fiscal exercises for the next, though interim, budget which has to provide the magnitudes of anticipated revenues and expenditures, is to drastically cut down approved budgetary expenditure across the board, plan or non-plan. He would rely also to a large extent on some delayed disinvestment receipts, a larger dividend turnover from the public undertakings already under pressure from the finance ministry, and a substantial revenue from the spectrum charges levied on the recommendations of the Telecom Regulatory Authority of India. The challenge of limiting fiscal deficit at 4.8 per cent of GDP in the current year has been highlighted by global institutions looking to the larger outgo on subsidies on food and fuel and other essential goods that have to be borne by the budget, which would not realise the anticipated growth in revenues in an under-performing economy.

On current account deficit, Government has suddenly turned optimistic with the assertion that it would be held at three per cent of GDP or even below as against more than four per cent projected by IMF and OECD for the current year and 3.5 to 3.8 per cent in fiscal 2015. This is perhaps based on two factors – the encouraging inflows so far through new channels including higher-rated NRI deposits and secondly a drastic reduction in trade deficit.

Though the freedom to banks to set interest rates on foreign currency deposits was originally valid till 30 November, it has now been extended till 31 January, to maximise such inflows. Secondly, import contraction and increase in exports helped by the sharp rupee depreciation had narrowed the trade deficit by 22 billion dollars in the first seven months (April-October) and this trend holds promise of a substantial reduction in trade imbalance this year.  India had relied too much on debt-creating inflows creating new concerns about its external debt profile and future policies cannot, therefore, be more of the same but such that would help to promote domestic investment, private as well as public, for both infrastructure and manufacturing and in effect, rebalancing future growth based more on domestic demand, investment and consumption.

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