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Alert: Economy on a MODIfication Mode

Whatever be the criticism of the current government, it has not so far deviated from its agenda on long term development. No doubt it has stumbled in its inability to take along the opposition and hasn’t cut much ice in areas like APMC and labour reforms. However, Modi’s government has shown urgency in pushing hard on all other fronts

Developments post Bihar election was the best that could have happened for the country. No, this is not about the election results or tolerance; this is about the reform measures taken by the government post result. In a way Bihar election result was a crossroad for the reformist agenda of the government. It could have very easily taken a turn for populism given the drubbing it got. But it chose to take the reforms path and came up with several important reform measures including on foreign direct investment (FDI), highways and railways etc. This was the most reassuring signal for the investors if they had any doubt on the long term agenda of the government.

There have been opinions lamenting slow pace of reforms since the current government took office. It is necessary to rewind a bit and see the problems which were ailing our economy and measures taken by the current government to counter them.

  • During May- Sep 2013, when INR depreciated sharply to hit a low of 68.80, it was the nadir of an economy abused for years
  • Inflation was stubbornly high for several years due to reckless demand stimulation without corresponding growth in investment
  • High fiscal deficit and highly indebted corporates
  • Sharply slowing economy
  • Slowing global economy
  • Frozen decision making and delays in regulatory and environmental clearances
  • Banks with progressively worsening balance sheets
  • Cronyism and corruption scandals
  • Rigid and archaic labour laws
  • Clogged courts and lack of contract enforceability

Some of the issues were of recent origin and some were old. But with such overwhelming odds, there was no silver bullet to turn the economy around and the expectations of miracle were perhaps due to the election hype. Firmly entrenched inflation and inflation expectation meant quick fix demand stimulation was out of question. Next best thing namely government spending, even for investment, was constrained by precarious fiscal conditions. In fact there is nothing that the government could have done which would have resulted in V shaped and sustainable recovery. Land bill and goods and service tax (GST) are enabling condition and efficiency booster and in themselves would not have kick started recovery. Couple of years of slow growth was inevitable to bring down firmly entrenched inflation expectation. The best government could have done is to spend the period in creating enabling condition, de-bottlenecking and spending on infrastructure. And on this parameter, one cannot find fault with the government.

The government started off on the right note by sticking to the 4.1% fiscal deficit target for 2013-14 and broadly sticking to the direction and targets of fiscal responsibility and budget management (FRBM).

It took a politically very hard decision on inflation targeting that too at ambitious levels suggested by RBI and thereby forfeiting the easier path for itself.

In pursuit of more efficient delivery of subsidy and financial inclusion it pushed hard for Jan Dhan accounts.

It took measures for reducing government role in banking appointments.

It brought transparency in auction of national resources like coal and spectrum. Its efforts at reducing red tape saw India has improved its ranking over the last one year on parameters like ease of doing business.

Two segments which can readily receive and deploy large scale investments are railways and highway. Highway contracts being awarded has risen to 23.4 km per day from 5.2 km in FY13 and 8.7 km in FY14. Railways has been in the news for substantial progress in lowering its operational costs, restructuring the decision- making process, proposed investment Rs 8.5 lakh crore over the next five years, projects to improve the quality of rolling stock, upgrade signalling, capacity enhancement and projects for rail connectivity to many ports and mines.

If the government succeeds in managing opposition/parliament and sticks to the path it has chosen for itself, there is little doubt India will continue to be a standout economy for times to come

It is working on the administrative side policies to bring back private sector investment, bankruptcy code for easy entry and exit, revival of state electricity boards (UDAY), foreign direct investment, national company law tribunal and establishment of commercial courts.

Other major long term initiatives include, Delhi Mumbai Industrial Corridor, Dedicated Freight Corridor, Sagar Mala, Smart Cities, Digital India, Solar Power etc.

It is normal for an elected government to focus its energy on projects which have tangible benefits in three to four years, in time for next election. It, however, takes a visionary to invest in projects which take longer to have visible benefits for example the Golden Quadrilateral initiated by Bajpai.

Whatever be the criticism of the current Government, it has not so far deviated from its agenda on long term development. No doubt it has stumbled in its inability to take along the opposition. It has possibly lacked in areas like APMC and labour reforms etc., but has shown urgency in pushing hard on all other fronts. Its handling of inflation despite two successive monsoon failures and hailstorm damage has been good, barring the lapse on pulses this season.

On account of balance sheet issues of Indian banks and corporates, government has been trying FDI route for boosting investment. However, given the global economic situation and excess capacity in almost all segments, its aim to encourage setting up export focused manufacturing in India is unlikely to give desired benefit. Government’s effort at investment, namely 70,000 crores targeted for the year is too small to take the existing slack and result in economic/investment revival.

In this backdrop, the government should seriously look at easing off on the fiscal deficit target for a few more years and scale up its role in investments. If the increase in fiscal deficit is purely for investment and if the government continues to work hard on reducing revenue deficit, it is unlikely that rating agencies or RBI would take an adverse view. It might mean fewer rate cuts for a year or two, but as we have seen rate cuts in themselves are not enough to revive demand. Next leg of growth for India has to be from investment in domestic infrastructure and currently there is no alternative to the government taking the lead in this.

If the government succeeds in managing opposition/parliament (NDA government in the past have managed to do it with even smaller majority) and sticks to the path it has chosen for itself, there is little doubt India will continue to be a standout economy for times to come. With luck, in time for 2019 elections!

Written By: K P Jeewan

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