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Issue No.: 575 | May 2015

State of the Economy – Issues and Challenges

Sunil S. Bhandare
The most vexatious issue currently confronting the Modi Government is the perception-reality divergence conundrum. Globally, there is a growing appreciation of India’s on-going progress with economic reforms agenda as well as growth performance and outlook. There are at least three impressive report cards for India – one each from the IMF, the ADB and the most latest being from the Moody’s Investors Service, which has revised India’s credit outlook to "positive” from "stable”. But several experts and keen spokespersons of business and industry do not seem to be amused – they believe nothing much has changed at the ground level. And the reforms implementation and growth turnaround continues to be tardy.

Global Assessment Versus Local Perception

Let us recapture quickly the sequence of this discernible shift in the global perception. Not long ago [early March 2015], the IMF acknowledged that "the Indian economy is the bright spot in the global landscape, becoming one of the fastest-growing big emerging market economies in the world”. It has also expressed confidence about strengthening of the growth momentum in the current year, which would be driven by stronger investment, declining inflation, commendable efforts towards fiscal discipline, government’s efforts towards ease of doing business, and the longer-term advantage of youngest workforce in the world.

In a similar vein, the subsequently released report of Asian Development Bank [ADB] points out that, as widely expected, India would overtake China in terms of growth performance – and more sharply so in 2016. Further, it recognizes that with Developing Asia remaining steadfast in its projected growth rate, there is going to be a gradual enhancement of India’s share and status in Asia’s economy. The report also concedes that India’s inflation outlook is improving compared to the scenario of the past four or five years and that this has positive implications on managing the competitiveness of India’s exports as well as relative exchange rate of the rupee vis-à-vis those of its major trading partners in this region.

Admittedly, both these assessments [IMF and ADB] about India as well as of the global economy are governed by set of assumptions. In particular, their separate forecasts are strongly influenced by the current low international oil prices, which certainly is facilitating inflation management and propping up economic growth. Indeed, ADB report also cautions that "the drop in oil prices provides an opportunity for many governments to take action now …….the window of opportunity is expected to be fairly short, as a gradual rise in oil prices is expected in 2015 and 2016”.

From the perspective of our policy makers, both the IMF and the ADB reports have series of well-meaning policy suggestions – many of which are surely being responded to. Illustratively, the IMF suggests that India needs to [a] address bottlenecks in the energy, mining and power sectors; [b] increase investment to help close major infrastructure gaps; [c] simplify and expedite the process of acquiring land and obtaining environmental clearances; [d] reform the agriculture sector to ensure greater efficiencies in the public system for food procurement, distribution, and storage; and [e] make labor markets more flexible, to encourage young job-seekers and boost presently low female labor force participation; and [f] improve education to meet rising shortages of skilled labor. Several of these find reflection in the ADB’s report. But one of its crucial suggestions is that India may have to diversify industrial bases and export markets, and also recalibrate the linkage with China because of the latter’s moderating growth.

Turning to the most recently released [April 9, 2015] assessment by Moody’s: "India has grown faster than similarly rated peers over the last decade due to favourable demographics, economic diversity, as well as high savings and investment rates”. Further, it expresses confidence that "there is increasing probability that actions by policy makers will enhance the country’s economic strength and, in turn, the sovereign’s financial strength over the coming years”. Consequently, there is now a greater chance of upgrading of sovereign rating, which for a long time has been in the lowest investment grade level. 

In addition, over the last eleven months, through his vigorously successful economic diplomacy with almost all the major countries of the world [including his latest foray in France, Germany and Canada], the Prime Minister has placed India’s growth agenda, be it "Make in India”, "Digital India”, indigenization of defence manufacturing or nuclear energy development on the global canvass. He government endeavours to deliver what it promises – the success of the latest budget session and the passing some of the key economic legislations offer adequate testimony on this score.

In substance, the global perception and outlook about India has strongly moved in the positive terrain. But from within that does not seem to be the case. And there is a constant reverberating voice "…..impatience creeping in as to why no changes are happening and why this is taking so long having effect on the ground”. Not surprisingly, the PM Narendra Modi has had to speak out his mind on this issue very candidly in his recent exhaustive interview with the Hindustan Times. Some of his statements seek to bring out some glaring contradictions, when he points out that "I would request the media to counter-pose two things together – the allegations our Congress friends level against us and the complaints that businessmen have; the Congress says we are a government of industrialists and industrialists say we do nothing for them!”

Among other things, what transpires from this interview is that the PM is becoming somewhat impatient about the lack of adequate response from business and industry in terms of revival of both their investment intentions and actual investment programs. Thus, he makes his anguish clear "the private sector of the country is still stuck with legacy issues of governance – these include tax terrorism, duty inversion and selective exemption”. Indeed, he has virtually exhorted [or appealed!] the businessmen to come forth by assuring them that "if you take one step, we will walk two for you”.

The Tipping Point?

From the perspective of keen observers of the economy – many of whom seem to be greatly perplexed by the complexities of divergence between what the government proclaims [or even what the international institutions assess] and the ground reality. The most overwhelming issue remains: when and how soon would the economy be in the midst of a tipping point phenomenon – that magical moment when the turnaround would be for real and gather a sustainable momentum?

Let us see what the Reserve Bank in its latest monetary policy has to say. It points out that the outlook for growth is improving gradually, and projects real GDP growth at 7.8% for 2015-16, higher by just 30 bps from 7.5% in 2014-15. This contrasts with what the Finance Minister has envisaged in his budget, namely, 8 to 8.5% real GDP growth rate. Even this cautious optimism in the considerations of [a] comfortable liquidity conditions enabling banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy; [b]implementation of the latest Budget’s initiatives to boost infrastructure investment and to improve the business environment; [c] conducive inflation outlook, delivering real income gains to consumers and lower input cost advantages to corporates; [d] a normal monsoon; and [e] continuation of the cyclical upturn in a supportive policy environment, and no major structural change or supply shocks.

In the same breath, the RBI highlights several formidable downside risks such as possible intensification of el nino conditions impacting the ensuing agricultural season; large deviations in vegetable and fruit prices given the current unseasonal rains; larger than anticipated administered price revisions; geo-political developments leading to hardening of global commodity prices; moderate and uneven global recovery; slowing down in China; geopolitical risks surrounding oil prices; and the uneven effects of currency and commodity price movements.

Concluding Observations

In summing up, immediate and substantial reconciliation between what the Modi government expects from the economy and what would be the actual growth performance seems extremely tough, if not impossible. Despite the best policy intentions and efforts of the government, positive stance of international institutions and inspiring foreign investment flows in stock markets, the real economy would follow its own logic of responding. All the stakeholders surely want restoration of investment cycle, acceleration of actual investment, industrial resurgence and the overall growth to gather sustainable momentum. But to make this happen the Modi Government has not only to pursue relentlessly their policy initiatives and developmental programs, but also fight the battle of conflicting perceptions in media and in the prevailing political ambience. At the same time, it must also deal with bridging the hiatus between what the government believes it has been doing and what the stakeholders think it is not doing enough or doing it with several fault-lines!

SUNIL S. BHANDARE is a Consulting Economist based in Mumbai. 






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The Rural Perspective - 6

Agriculture and Rural Indebtedness - VII

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