Modi government faces more growth risks
By S. Sethuraman
The Narendra Modi Government, the strongest in three decades to take over in May 2014, completes its first year of office this month end with a creditable economic turnaround and impressive growth agenda, but faces a toughening challenge from a resurgent opposition on a populist track, which could derail some of its major reform policies like land acquisition.
Any euphoric projection of the Modi Government’s first year achievements would run counter to the widening perception of an authoritative governance failing to live up to the great expectations Prime Minister Narendra Modi had raised across the country while securing the most impressive electoral mandate in 2014.
The year ends amid rural distress exacerbated by untimely rains and the outlook for crops in the fiscal year also looks bleak with the forecast of less than normal monsoon in 2015. Agriculture had not gained its pride of place in the Modi Scheme of reforming the Indian economy. The focus has been high on manufacture through “Make in India” and modernised urban infrastructure.
Lack of work opportunities in rural areas – as reflected in the galloping farmer suicides in several regions – and low incomes apart, the disenchantment is more explicit in regard to lack of pick-up in growth and jobs among the middle classes as well as lowered expectations both among corporates and investors though India remains the big growth story for the medium term.
The Modi Government has not lacked in reform initiatives though overall it has failed to bring about a noticeable change on the ground. The reform agenda so far included deregulation of diesel prices, fixing of natural gas price, launching of coal mine and spectrum auctions to beef up key infrastructure, relaxation in FDI limits in several key sectors, financial inclusion and a flexible institutional framework to contain inflation.
All this is quite apart from Mr Modi’s successful image-building efforts for the nation on his expanded foreign travels and moves for greater cohesion within the South Asian region and for strengthening links with other neighbours in the east and west. Mr Modi’s prompt initiatives on a massive relief mission for quake-devastated Nepal and rescue of Indians in embattled zones of Gulf region have been lauded.
Business, confidence is intact but the investment revival is yet to take off. Maybe the highly leveraged corporates are marking time for more policy measures, especially on infrastructure. The markets have recently been on a downturn reflecting a drop in equity purchase inflows, Government’s political discomfort in pushing land and other major reforms, and a lack of demand boost despite lowered inflation.
Majoritarian assertions of the ruling BJP both on the economic and social fronts may have fuelled more concerns doing no good to Government’s image. Failure to make early efforts to build political consensus on crucial issues with convivial approaches to opposition could have resulted in greater accommodation from the other side in getting through reform-oriented legislative business. At least, there was unanimity in enacting the land agreement with Bangladesh. A confluence of positive factors such as low oil prices helping to lower inflation and improve fiscal and external positions, moderating vulnerabilities, and capital flows boosting reserves turned India into “bright spot” in the global economy. While China has slowed down due to rebalancing its economy, other Asian countries are performing below potential.
India is also performing below potential ( by an estimated 1.7 percentage points compared to pre-crisis levels) which may continue over the medium term. According to IMF, India’s growth will stabilise at 7.5 per cent in 2015 and 2016. While near term growth outlook looks favourable, medium term prospects are constrained by structural weaknesses, it says.
The downside risks to sustain the growth momentum include “surges in financial market volatility, slower global growth, and policy implementation risks within India”, IMF’s Regional Outlook for Asia and the Pacific points out. India’s economic turnaround began in “mid-2013” helped by a tight monetary stance to contain inflation, lower global commodity prices, and government efforts to contain food inflation. The latter afforded RBI space to lower policy rate by 50 basis points in early 2015.
India is now “better placed to deal with external financial shocks”., IMF noted but calls attention to supply side bottlenecks and delays in implementing infrastructure projects (which have worsened banks’ asset quality) constraining growth. Corporates’ vulnerability indicators also remain elevated.
Additionally, the country now faces, besides the prospect of a bleak monsoon, a possible reversal of low oil prices or getting stabilised at above 60 dollars a barrel. This may trigger inflationary pressures afresh which, given supply side shocks, could jeopardise the achievement of the agreed medium term inflation target of 4 per cent (plus or minus 2 per cent).
As policy requirements, IMF has called for maintenance of a tight monetary policy for durably meeting the inflation target accompanied by structural reforms to boost food and agriculture production. Continued progress is also needed to strengthen monetary policy transmission to ensure that changes to the policy interest rate are passed through to lending and deposit rates, including by lowering reserve requirements.
On fiscal consolidation, IMF has urged the revised road-map of hitting 3 per cent of GDP as deficit by 2017/18 should be underpinned by a strengthened Fiscal Responsibility and Budget Management Act. Other policy actions suggested include comprehensive overhaul of food and fertilizer subsidies and measures to raise the tax-to-GDP ratio to finance social and capital spending priorities.
Globally, the Asia-Pacific region still remains relatively dynamic contributing 40 per cent to world output but while India may have the tag of fastest-growing economy, financial vola-tilities are seen likely to disrupt the region’s favorable outlook. The emphasis is thus on building resilience and enhancing productive capacity. (IPA Service)