Uphill task to kick-start growth

Global markets turned volatile from the start of the New Year and world growth, which slowed down to 2.5 percent (market-based exchange rate), in 2015 faces more challenges and uncertainty in 2016 which would make it a “bumpy ride” for the developing world. Indian market is already down to the pre-Modi levels.

Whatever the growth ambitions at home and visionary launches of the Modi Government for the longer term, India, while immensely benefitting from low oil prices, would be no exception to the contagion effects of China slowdown. Other risks are the stronger dollar and global risk aversion already noticeable in capital outflows from India and other developing countries.

lndia, in the midst of fiscal and infrastructural challenges in framing a critical mid-term budget for fiscal year beginning April 1, 2016, will certainly find it difficult to push growth to the economy’s potential at 8 percent.  IMF in its January Update has projected 7.5 percent for both 2016 and 2017.

2016 is going to be a year of great challenges worldwide and economic policymakers should be thinking about short-term resilience to overcome risks while improving longer-term growth prospects.  IMF says global growth itself could be derailed if key challenges are not successfully managed.

Such risks cited include ongoing adjustments in the global economy, a generalised slowdown in emerging market economies, China’s rebalancing and the slated revision of interest rates by US Fed at intervals. The stronger dollar, lower commodity prices, and strains in some large emerging market economies (Brazil, Russia) would continue to weigh on growth prospects in 2016–17, according to IMF.

India and the rest of emerging Asia are generally projected to continue growing at a “robust pace” although with some countries facing strong headwinds from China’s economic rebalancing and global manufacturing weakness.

Growth in China is expected to slow to 6.3 and 6.0 percent in 2016 and 2017 respectively, IMF said. China has now officially confirmed it grew 6.9 percent in 2015, (conforming to IMF estimate), the slowest in a quarter of a century. The last quarter of 2015 saw the economy record 6.8 percent.

The Beijing statement acknowledged a “daunting task in deepening reforms on all fronts” for its 10.3 trillion dollar economy and to step up supply-side structural reforms. Industrial growth slowed to 6.1 percent from 8.3 percent in 2014. China’s relatively slower service sector hitherto accounted for 50.5 percent for the first time.

India, as an importer of commodities, may experience less inflation pressures at present, but currency depreciations accompanying reduced capital inflows could limit the scope for policy easing to support demand, IMF points out. While a modest recovery may be on in advanced economies, it is the emerging market and developing economies that would face “the new reality of slower growth”.

Also, what is underlined in IMF Update is that a sharper-than-expected slowdown in China could bring more international spillovers through trade, commodity prices, and waning confidence. The dollar appreciation could also lead to tighter global financing conditions.

Increasingly, day to day concerns are now focused on China’s stock and currency markets and on what use its authorities make of its policy instruments to restore calm and stability in  the financial market. Because.  a sudden bout of global risk aversion could lead to sharp further depreciations of exchange rates and financial strains in vulnerable emerging market economies.

Against  such  grim global scenario globally, the Finance Minister Mr Arun Jaitley faces the challenge of making good at least some of his promises aplenty on what he would seek to do while presenting the 2016-17 Budget on February 29.  He has said while adhering to fiscal path chalked out earlier, he would take care of capital expenditure and social development concerns.

Can India doggedly adhere to the fiscal path to keep down the deficit at 3.5 per cent of GDP in the next fiscal and yet provide for a thrust in public investment, with all the promised tax and other reforms in place? And will it be another elusive growth target without jobs.

In any case, Mr Jaitley has to deliver on a rationalised tax policy, for both corporates and individuals, that would evoke better response via revenues. He has a plethora of reports of expert committees on taxation, expenditure management and public-private participation in infrastructure development.

In line with his claim he would present a tax-friendly budget, Mr Jaitley would have to take on board some of the Easwar Committee recommendations like raising the threshold limit and cutting tax rates, at least keeping in view the need to promote savings for the economy instead of present reliance on borrowings to grow the economy.

After the first two disappointing budgets for the foreign investors, Mr Jaitley would be expected to bring greater clarity and simplification of procedures, at least to remove one of the irritants that deter investors.  It is in the area of indirect taxes, customs and excise, that Mr Jaitley would do his utmost to make up for additional revenue needed to hold down the targeted fiscal deficit and provide for the additional expenditure.

Indeed, there would be expectations on the forthcoming budget on what it does for the rural sector which the Modi Government has lately turned to giving more attention, perhaps realising at last the extent of  distress on the farm front but more guided by political instinct with the elections in several states in 2016-17.

There are certainly limits to what a Union Budget, however enlarged, could do to repair the ills of the economy.  But certainly, Government must respond to the capital requirements of the banking system and not let another year pass by without effective measures to improve its credit system, given the needs of an expanding economy.

Hopefully, Mr Jaitley would frame his budget in a manner that is not largely confined to restructuring the corporate tax regime but would also embody a strategy that promotes both corporate investment revival and overall increase in private consumption.

Holding the consumer price line would depend on the efficacy of the supply-side management which has not been shown up thus far. While low oil prices are set to continue through 2016, and help to boost government finances, the consumers must not be let down at a time when the inflation is already on an uptrend and food inflation on accelerating pace.