Millennium Post

Not raining, but it’s sure drizzling money!

Not raining, but it’s sure drizzling money!
As the Modi Government completes its first six months with a record of hesitant, incremental moves on the economic front, growth recovery has at last become visible and looks to gain momentum to hit the targeted 5.5 per cent or slightly above, in fiscal ’15. Business sentiment is being bolstered by falling inflation and output modestly growing by 2.8 per cent in the first half (April-September), though investment pick-up is awaited.

Political stability in the wake of landslide victory for the rightist BJP and pro-business prime minister Narendra Modi in the May 2014 elections had raised high international expectations on major product and labour reforms, on top of the cap revisions made for FDI in insurance and defence, along with some easing for doing business and for project clearances. There is no doubt India is again being eyed as one of the most attractive destinations for foreign investments.

Based on reform agenda and other assumptions such as price stability, monetary policy adjustments, project clearances and the country’s ability to manage external shocks, the Paris-based OECD has projected India’s growth to record an average of 6.7 per cent over the five years 2015-19. If realized, it would almost close the gap with a slowing Chinese economy set to record 6.8 per cent over this period.

The OECD Economic Outlook for South East Asia and China and India says growth in Emerging Asia as a whole is buoyant at not less than 6.5 per cent average, and most countries are well-positioned to manage external risks. These relate to normalisation of US monetary policy, slowdown in the Chinese economy, and uncertainties on Euro growth prospects and implementation of structural policies (Abenomics) in Japan.

India’s medium-term growth average of 6.7 per cent would be above the averages for Asean-10 and Emerging Asia at at 5.6 and 6.5 per cent respectively. Also in private consumption and gross fixed capital formation, India’s average at 6.8 and 7.2 per cent respectively would be above the regional averages. But India’s current account deficit will remain at an average of -2.3 per cent of GDP as against China’s surplus at 2.6 per cent and positive averages for the region, barring Indonesia’s -.3.3 per cent of GDP.

In India, growth is expected to increase as exports and investment pick up, helped by lower political uncertainty, several positive policy actions, improved business confidence, and reduced external vulnerabilities, IMF adds in a note to the G-20 Summit at Brisbane (Nov 15-16) being attended by prime minister Modi.

The OECD outlook takes note of the new government’s ambitious economic policy agenda, which includes domestic and foreign investment promotion, job creation, food security, quality education and skills development, creation of new infrastructure, and increase in India’s competitiveness, especially in manufacturing. But, it cautiously adds, whether the triumphant new administrations in India and Indonesia would be able to live up to the public’s rising expectations for rapid economic growth and reform remained to be determined.

Both OECD and IMF emphasise priority for structural reforms to strengthen growth potential, G20 has set a target of raising collective output by at least 2 per cent above the medium-term baseline estimates ranging upto 3.9 per cent, over the coming five years.  IMF has urged growth–enhancing structural reforms in emerging economies that have had protracted and broad based slowdown. India is among a few countries listed for removing infrastructure bottlenecks in the energy sector to enhance productivity, and for reforms to education, labor and product markets.

Since October when global growth was lowered to 3.3 per cent in 2014 and projected at 3.8 percent in 2015, an ‘uneven and brittle global recovery continues, despite setbacks this year’, IMF said.  Overall, slow growth highlights the importance of G20 commitments to raise global growth. Recent developments have been financial market correction, fall in oil prices, and some further signs of weakness in activity, mainly in advanced countries.

The recent appreciable fall in oil prices, if sustained, should boost growth. Lower oil prices have helped Governments in some countries including India to cut subsidies, but these cuts are likely to eventually translate into price increases in energy-intensive sectors and in wages as well, OECD noted.

Inflation in India has eased but the level is still relatively high compared to other countries in the region. CPI inflation in October further declined to 5.52 per cent, the lowest level since January 2002. But food items, especially cereals, pulses, condiments, milk and vegetables range above 6 to 11 per cent.

In other words, for the ordinary consumer, prices are still higher. Industrial output, fluctuating at low levels month to month, recovered to a 2.5 per cent rise in September and growth in first half (April-September) was 2.8 per cent.

IMF note to G-20 says for some economies including India, maintaining the course of fiscal consolidation is critical, given large fiscal deficits and high inflation in some cases, and high external borrowing that has increased exposure to external funding risks in others. Monetary policy tightening may also be necessary should inflation expectations worsen.

RBI, though again under pressure to cut the benchmarket (repo) rate it has maintained at 8 per  cent since January 2014, is unlikely to relent at this stage and most economists consider the first cut likely be in the last January-March quarter of fiscal ‘15.

Finance minister Mr Arun Jaitley, with all his commitment to holding deficit at 4.1 per cent of GDP, will be hard put to achieve the target, given the level of expenditure, tax revenues falling behind so far, and the depreciation of the rupee pushing up prices of essential imports.

In its projections for 2015-19, OECD says the deficit will slowly narrow in the wake of the introduction of a goods and service tax. Introduction of GST would rationalise indirect taxes while preserving states’ financial autonomy.   
IPA



Ideally, a single tax rate should apply in each state and where differential rates apply they should be kept as low as possible and confined to a limited range of products. However, a major effort is required to define implementation details and to measure the gains or losses for each State and the Federal level.
But questions remain whether BJP’s parliamentary majority would enable it to overcome legislative barriers for faster economic reform. Amid rising concerns on jobless growth, Mr Jaitley concedes certain reforms would not be easy to get through, like labour market deregulations.
With diverse regulations across states, lack of clarity makes India a fragmented market, which is regarded as hampering domestic and foreign investment, productivity growth and job creation. At the federal level, absence of consensus amongst the social partners may hinder the evolution of a more unified labour market regulatory policy framework for India.




S Sethuraman

S Sethuraman

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