Now, more than ever, Modi should stay the course on economic reforms with conviction and commitment
The wheels have come off the bus, a high base effect has seen a slowing economy decelerate faster in the last quarter of the financial year that has just closed. Agriculture with a 5.2 per cent growth rate against 1.5 per cent in the corresponding period of the previous year has saved India the blushes yet again, ensuring the tipping point at 6.1 per cent. India is no longer the fastest growing economy in the world. Not only did demand destruction take place due to demonetisation, the fourth quarter part of a new time series shows vast swathes of the economic landscape devastated — mining, construction, manufacturing and finance slowing down considerably. Construction was worst hit, actually showing a de-growth of 3.7 per cent compared to a growth of 6 per cent in the corresponding quarter.
Unfortunately, the results of demonetisation are visible only now. Finance minister Arun Jaitley put on a brave face at his presser on thursday — “There are several factors which can contribute to GDP in a particular quarter. There was some slowdown visible, given the global and domestic situation, even prior to demonetisation.” What is of even greater concern is the sharp fall in capital investments. Since coming to power in May 2014, Modi has ramped up public spending, hoping to boost weak private investments. Yet recovery remains elusive. Jaitley conceded that getting higher corporate spending remained a challenge, but said that was partly due to the inability of a debt-laden banking sector to fund investments. Saddled with $150 billion of sour debts, banks have been slow to grant loans, especially to businesses perceived as riskier. The growing contingent liability risk from burgeoning NPAs has created an even bigger problem for credit demand is at its weakest in 50 years.
The only positive emerging from the GDP fiasco is that stock markets remained robust taking the knock on the chin, gushing foreign and domestic liquidity holding things steady. This is the time for the government to commit itself to deep structural reform. One is hearing all the right noises on Air India privatisation and resolution of banking NPAs. Modi government had conceded way back in November 2016 that demonetising 86 per cent of the country’s high value currency to fight parallel cash economy and illegal cash stash would have disrupting impact on the economy. Which it has done. Though the positive impact on enlarging the tax base and revealing tax evaders often gets lost in the new narrative. Given the lag effect, demonetisation impact seems to have been largely shifted to fourth quarter of 2016-17 pulling down the GDP growth to 6.1 per cent. Central Statistical Organisation (CSO) data released on Monday reflected also the tortuous three-month long re-monetisation spearheaded by RBI. If the decline in economic growth persists in next two quarters, only then the slowdown could be conclusively established. What seems to have become the mood changer was the fact that economy clocked a growth of 7.1 per cent during 2016-17 while industry output was higher and wholesale price inflation lower as per the new series.
With or without currency demonetisation, the biggest worry for this government has been sluggish investments takeoff from private sector, especially the domestic enterprises. Most interestingly, while foreign direct investment (FDI) touched $60 billion in the fiscal, desi enterprises continued to play truant on either expansions or green field projects.
Gross Value Addition (GVA), a more precise reflector for economic growth after having excluded taxes and subsidies, portrays a pathetic picture of private sector investments growth in 2016-17. GVA fell to 6.6 per cent from 7.9 per cent in previous financial year mostly due to private sector sitting tight. Less than expected private investments was notwithstanding the fact that public investments during the fiscal hit a record high. Pumping in billions of dollars in infrastructure projects with protracted gestation timelines seems to have not helped reviving the investment sentiment among homegrown companies. As usual, farm sector, along with associated industries, has been the saviour with 4.9 per cent growth due to more than normal monsoon resulting in record food grain production, pushing up the demand for goods and services. One has to perhaps factor in the next phase of disruption owing to introduction of goods and services tax (GST) beginning July 1 that may have teething trouble across sectors including services. But, the pain in transition to a more formal economy and easier taxation regime should be minimised through substantive economic reform policy package. While disruptive signals even in one sector cannot be ignored, benign inflation, low interest rates and modest crude price regime have to be gainfully utilised by the government to lay the foundations for a long haul double digit growth.
Advancing the federal budget by a month along with subsuming of railway budget must be seen in this context. Further, possible advancement of financial year to January 1 could have positive impact on the reforming the public finances with positives for the economy. In the meantime, even 7.4 per cent growth projections made for next fiscal is by no measure modest. Staying the course on economic reforms with conviction and commitment should work for India.