Shifting economic gears

The Indian economy is forecast to grow by 7.3 per cent in the medium-term during 2019-23, says the OECD Economic Outlook for Southeast Asia, China and India 2019. Labour market conditions point to solid growth in private consumption, although rising inflation and interest rates can be drags. The push for consolidation will most likely limit the government's spending flexibility as well. How infrastructure projects are carried out will be the key. Maintaining banking sector health is another challenge.

The biannual publication prepared by the Asia Desk of OECD Development Centre in cooperation with Economic Research Institute for ASEAN and East Asia (ERIA) and the United Nations Economic and Social Commission for Asia and Pacific (UNESCAP) noted that India's economy expanded 8.2 per cent in the first quarter of the financial year ending March 2019. Economic growth forecasts point to a slower growth of 7.5 per cent in 2018 and 7.3 per cent in 2017. The positive near term factors include sturdy bank credit growth in 2Q 2018 and the recovery in the year-on-year growth in tourist arrivals to 4.1 per cent in 2Q 2018 from 1.6 per cent in the 1Q indicating the strengthening of private spending. It is unlikely that government price stability mechanisms will be scaled back until the end of the fiscal year.

Private spending accounted for more than half of the growth of 1Q 2019 as headline inflation receded despite weakness in the local currency and rising oil prices. However, in comparison to 4Q 2017, fixed investment growth slowed down from 14.4 per cent to 10 per cent in 1Q 2018. Growth in public spending, by contrast, decreased from 16.9 per cent to 7.6 per cent. The public spending was obviously in line with the government's intention of trimming the deficit for the fiscal year.

Factors such as the continuous climb in global oil prices, a weak currency and rising interest rate do not bode well for consumption. Consumers remained generally pessimistic. Fixed investment prospects too are dimmer. Apprehensions were compounded by a decline in the growth of infrastructure industries index. Hikes in Central bank policy rates supporting uptick short and long-term bond yields also present challenges to the resolution of bad debts.

However, the projected growth will depend much on infrastructure projects which are more than 1,300 in number. The projects were originally valued at around Rs 16 lakh crore or $216 billion. These projects would hold the key to India's medium-term economic performance during 2019-23. The manner in which the projects will be delivered is equally crucial to the mitigation of credit and fiscal risks.

Incidentally, a government assessment noted that delays had already affected 263 projects in May 2018 due to issues related to land acquisition, forest clearance, supply of equipment, fund constraints and geological surprises, for example (MOSPI, 2018). Another 348 projects had logged cost overruns, which carry excess cost amounting to over Rs 3 lakh crore or $41 billion. These cost overruns are equivalent to more than 19 per cent of the initial total cost.

Investment in areas outside infrastructure will just be as crucial and it is encouraging that FDI inflows have continued to rise. Since 2017, India has gradually opened up further sectors to foreign participation. These include retail, private security, construction, air transport and pharmaceutical sectors. Private consumption is likely to remain buoyant during the period given the positive labour market situation, as long as the inflation and interest rates do not pick up steeply in the coming months.

The report recommends that India's medium-term plan should be transforming the country into a prosperous, highly-educated, healthy, secure, corruption-free, energy-abundant, environmentally clean and globally influential nation by 2031-32.

The recent developments in the policy areas in India mainly include education, manufacturing, health, infrastructure and FDI. The National Policy on Education under development was to be implemented by the end of 2018. A new defence production policy under development targets a Rs 1.7 trillion turnover in military goods and services by 2025 with exports from the sector totalling Rs 350 billion. The procurement process is also to be simplified under the plan.

The report primarily enlisted FDI as the major structural policy challenge in the country. It says that continuing FDI reforms and developing opportunities for technology transfer will remain key issues. It is more so because as a percentage of GDP, inflows of FDI into India have declined from a recent peak of 3.8 per cent in 2008 to 2 per cent in 2016. This rate was lower than in most other Emerging Asian Countries. FDI has still an important role to play in India's growth and development

The report mentions that reforms to FDI regulation are being made under the Make in India initiative, liberalising inflows in a number of sectors. Along with this initiative, efforts are being made to improve the business environment generally. However, more can be done to realise the full potential of foreign investment, particularly in fostering technology transfers and productivity growth. Policy options include training and education, protecting intellectual property rights, promoting FDI in technology-intensive sectors, enhancing performance requirements linked to the transfer of technology, offering investment incentives, and retooling policies restricting FDI. At the same time, it is important that FDI supports inclusive growth by generating employment through a balanced geographical distribution.

(The views expressed are strictly personal)