A roller-coaster ride for economy

The Modi government’s four-year tenure has been a roller-coaster ride for the Indian economy. A mix of global developments and internal policy decisions ensured that the economy continued to spring surprises with both positive and negative impacts.

At the time Narendra Modi took oath of office in 2014 to become country’s 16th prime minister, the economy was on auto pilot mode with policy paralysis ensuring that growth slowed to 6.9 per cent of GDP while fiscal deficit remained at a high level of 4.5 per cent. There was also a sense that executive inaction had robbed investor confidence in the economy while the 2013 pernicious land acquisition act was creating a stumbling block for anyone who had a viable investment plan.

With these challenges, the Modi government began work taking up issues one-by-one and promising to bring about a change quickly. Thereafter, the four years of Modi-led National Democratic Alliance (NDA) government have been a mixed story of good luck on oil and monsoon, reforms and repair, disruptions, and slower growth.


Low volatility

On the macro-economic front, the past four years have remained more of less stable with signs of improvement and lower volatility. India’s gross domestic product (GDP) grew at 7.3 per cent per year in the past four years, which was lower than the trend of 7.6 per cent in the preceding decade. The growth slowdown was partly a result of policy choices aimed at improving macroeconomic parameters such as inflation and fiscal deficit.

But two decisions of the government played a key role in slowing down the economy at a time when the good luck factor from crude oil was already drying up. The 2016 decision on demonetisation and later the Goods and Services Tax (GST)-related glitches ensured that business activity in the country slowed down with GDP growth plunging to 5.7 per cent in the April-June quarter of FY18 with full-year growth falling to the 6.6 per cent level.

“The economy seems to be on the recovery path this year but there are lots of issues hanging around. The impact of demonetisation is still not complete. Now if consumer price inflation starts creeping up, the Reserve Bank of India will have to go in for contractionary policies that would slow growth. The economy is bound to face head winds,” said Pronab Sen, former chairman, National Statistical Commission, and principal economic adviser, Planning Commission.

Reforms and improvement in macroeconomic balances, though, have not improved business sentiment as per surveys by the RBI, the National Council of Applied Economic Research, and business chambers. But, growth slowdown has not taken away India’s fastest growing country tag. India has also improved its global competitiveness position and ease of doing business rank due to reforms focus of the government. However, corruption ranking, after initial improvement, again slipped in 2017.

“For the quarter ending March, 2018, one finds corporates reporting significantly higher earnings. If you look at the four-year report of the government, I don’t think there was any significant increase in the economic activities in the first three years. However, in the last 6-9 months we have seen an upturn and there is an absolute mood of positiviness,” said Dinesh Kanabar, chief executive officer at tax advisory firm Druva Advisors.

Improving twin deficit was another hallmark of the NDA regime though some of the gains were reversed in fiscal 2018 with 30 basis points (bps) slippage in fiscal deficit/GDP and surge in the current account deficit. The rising oil prices do not augur well for the country as it could adversely impact the twin deficit.

The GDP in past four years is slower than average clocked in the previous decade under the UPA regime, but there has been “visible improvement” on other macro indicators, Crisil's chief economist Dharmakirti Joshi said.


Worrying aspect

One of the major achievements of the Modi government has been consistently high foreign direct invest (FDI) in the past four years. But, even with the pick-up in FDI, there has been no notable uptick in private investment. Another worrying aspect of the last four years has been the surge in non-performing assets of the banking sector that has enlarged the government’s recapitalisation programme to Rs 2.11 lakh crore.

According to a report by ratings agency Crisil, on a net-net basis, many of the reforms initiated by the Modi government are work in progress and need relentless execution focus.

“Without doubt, these create an upside to the medium-term growth trajectory. So, the focus in 2018 should be to consolidate action on reforms already announced. GST and the Insolvency and Bankruptcy Code are the key reforms with potential to be game changers for the economy over the coming years,” the Crisil report on state of the economy said.

But oil can play spoilsport to all the efforts being made to bring back the economy back on the growth path. “The government’s efforts to ensure a well-oiled economy could be tested in its fifth year in office as multiple risks materialise, led by exogenous factors such as a runaway rise in global crude oil prices,” the Crisil report said.

Subhash Narayan