Can Modi Government upturn economic growth?
By Ashok B Sharma
The Modi Government is faced with the dual challenge of bringing an upturn in the economy by achieving a growth rate in the range of 5.4 per cent to 5.9 per cent and moderating the trend in price inflation.
The slowdown in the economic growth rate in the last two years has been broad based, affecting particularly the industry sector. The growth rate in the last two concluding years of the UPA-II regime was 4.5 per cent and 4.7 per cent. The BJP boasts that the Vajpayee-led NDA government completed its tenure in 2003-04 when the country enjoyed a growth rate as high as 8 per cent, while the Congress-led UPA-II regime has handed over power to them in a sluggish state of economy. The Prime Minister Narendrabhai Damodardass Modi had often criticised the UPA government as suffering from “policy paralysis” and unable to bail out the country from this sorry state of affairs.
The government’s report on the current state of economy, Economic Survey 2013-14 has thrown a challenge to the Modi Government to achieve a growth rate in the range of 5.4 per cent to 5.9 per cent.
The below 5 per cent growth rate in the last two concluding years of the UPA regime was mostly due to the interplay of structural constraints alongside delays in project implementation, subdued domestic sentiments and an uncertain global milieu, according to the Survey. This situation rendered macro-economic stabilisation difficult. Prices of essential commodities remained at high levels, above the “comfort zone” primarily due to elevated prices of food.
The situation caused risk-aversion and injected considerable uncertainty in investment climate. The task of monetary policy calibration for growth revival was difficult due to persistent inflation and uncertainty in international financial conditions leading to the depreciation of the rupee. However, the Survey has admitted that the previous government could bridge the current account deficit (CAD) to manageable levels after two years of worryingly high levels. The fiscal deficit of the government as a proportion of the GDP also declined for the second year in a row as per the announced medium term policy stance.
With financial markets surging ahead on expectations of a better future, the Survey suggests moderation in price inflation would help ease the monetary policy stance and revive the confidence of investors. It also suggests that India should seize this opportunity as the global economy is expected to recover moderately particularly on account of performances in some advanced economies.
It is important for Modi Government to create conditions for attracting investments for many of its dream projects recently announced like launching of Bullet Trains (with speed above 200 kmp), increasing the speed of trains on certain track to 160 to 200 kmp with an ambitious plan to have a Diamond Quadrilateral Network, connecting major Metros and growth centers of the country. Attracting investments in key infrastructure sectors is challenge before the government.
Apart from attracting investments that may lead to more job creation, the Modi Government faces another challenge of containing price inflation. Forecasts by the IMF expect international commodity prices to remain benign. This should help in moderation of Wholesale Price Index (WPI) headline inflation. However, there are risks of crop failure and slowdown in farm growth on account of predicted monsoon failure that may result in rise in food prices. Besides crude oil prices remain high due to uncertainty in geopolitics of Gulf countries.
There are hopes that with ample food stocks in the country, the government will be able to contain the price inflation trend in food and other essential commodities. Government needs to crackdown on hoarders and market manipulators. Government also needs to reign in the activities in commodity futures markets in the country.
However, whatever suggestions of a market-driven economy given by the Survey, the Modi government should have a human face for farmers in distress, particularly at times of monsoon failure. Adequate subsidy on fertilisers, food and inputs should reach the beneficiary directly. Development of the social sector should not be ignored in favour of a market-driven economy.
Service sector has emerged as the fastest growing sector of the economy and the second fastest growing in the world with a CAGR of 9 per cent, just behind China with a CAGR of 10.9 per cent in the period 2001-2012. Services have also contributed substantially to foreign investment flows, exports and employment. The share of the services sector in employment increased from 19.7 per cent in 1993-94 to 26.9 per cent in 2011-12.
Like industry, services also slowed down during the last two years. The deceleration in growth was particularly sharp in the combined category of trade, hotels and restaurants and transport, storage and communications. However robust growth continued in financing, insurance, real estate and business services. Finally the Modi Government needs to strike a judicious balance between development and environment conservation and preservation. This would be a real sustainable development leading to the achievement of Sustainable Development Goals (SDGs) in the long run. (IPA Service)