Macros look good but prices still high

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GDP growth hits 9-quarter high of 5.7%

Macros look good but prices still high
A hundred days after the Narendra Modi government came to power, how does the picture look? At the macro level, there are signs of uptick in the economy but inflation remains a concern. Some analysts argue that the need of the hour is still to learn from UPA’s mistakes, introduce populist measures and carry out major structural reforms to put the country back on the high growth path.

The mood, buoyant with a stable government in power after 30 years, is evident from the fact that GDP growth clocked a nine-quarter high of 5.7 per cent in the April-June quarter.

This gave finance minister Arun Jaitley confidence to say at a press conference on Saturday that achieving the target of 4.1 per cent fiscal deficit this year which he considered “daunting and challenging” at the time of the budget in early July, is now a possibility.

This is one positive step towards containing inflation but what is more complex is retail inflation. If one goes by government data, the dearness allowance paid to government employees, which is pegged to CPI, has become 100 per cent in seven to eight years since implementation of the sixth pay commission.

This means that compounded retail inflation has remained high at over 8 per cent for the last seven to eight years. “This is a serious issue,” India’s chief statistician T C A Anant told Financial Chronicle, emphasising inflation over a long period will not be tamed by mere monetary action.

Several economists repeatedly argue that high inflation, particularly food inflation, is due to the last government’s populist measures. Senior BJP leader and former finance minister Yashwant Sinha blamed it in parliament on the UPA’s Rs 71,000 crore loan waiver to farmers, sixth pay commission arrears and MGNREGA.

But high minimum support prices for grain and the jan dhan yojana too will be inflationary.

It was launched with fanfare by the prime minister last week to provide at least 100 million new bank accounts as part of the government’s financial inclusion mission. The idea is to ensure all households have at least one bank account by January 26 next year.

Financial inclusion is as good as MGNREGA, but on the flip side, it is also likely to contribute to inflation. All the money stashed in rural and urban households could find its way into the banking system, but it would fuel inflation. Even if each of these 10 crore new bank accounts brings in

Rs 5,000 cash on an average, a Rs 50,000 crore liquidity would get

injected into the banking system. And inflation would be the unintended consequence.

NIPFP economist N R Banumurthi agrees that there is an inflation

component to this ambitious financial inclusion programme, but like in

MGNREGA, it is a small price to be paid as the programme would be

beneficial for the economy.

India's fiscal deficit in April-July, the first four months of this

financial year, was Rs 3.25 lakh crore, which was 61.2 per cent of the

full year target, CGA data showed.

Icra senior economist Adity Nayar said that at an absolute level, the

fiscal deficit is 5 per cent narrower than the level in the first

four months of the previous year but this reflects partly 11 per cent

contraction in non-interest expenditure, which is a cause for concern.

In particular, plan expenditure in April-July was 12 per cent

lower than the year-ago period, highlighting that productive

expenditure is yet to pick up. Also net tax revenues displayed a

marginal growth in April-July, indicating that the achievement of the

budgeted growth target of 20 per cent is challenging, she said.

But Jaitley told a news conference on Saturday that he was more

confident of meeting a tough fiscal deficit target of 4.1 per cent set

in the budget in July, despite having breached the target in the first

four months of the year.

"What was then accepted as a challenge, with the first quarter GDP

results, I think is something that is certainly achievable. My

confidence today of achieving this target is much more,” he said.

Jaitley expects the tax revenue to improve in the coming months, as

is the case every year with advance corporate tax payouts coming in.

The government has also indicated that disinvestment of public enterprises

would gain momentum in the next two to three months, resulting in more

revenue into the government kitty.

The ambitious disinvestment plan will take off soon, Jaitley said,

adding the rollout of GST, game-changing indirect tax reforms as well

as a major structural reform is also being pursued vigorously with

state governments.

“I am individually discussing with finance ministers and chief

ministers of some states, which had raised issues with regard to GST

and an early passage of constitutional amendment bill is on top of the

government’s agenda,” Jaitley said.

Stressing that the manufacturing curve has turned and services sector

is looking up, Jaitley said, “in the first quarter (April-June), a 5.7

per cent growth rate is encouraging. With the long-term impact of all

the new initiatives setting in, I am sure the impact in the coming

quarters will be much larger.’’

But Nayar said some factors that boosted GDP growth in the first

quarter are unlikely to sustain in the ongoing quarter, such as a

temporary pickup in activity after adjusting for seasonality in

construction following low rainfall in June 2014 and a favourable base

effect for sub-sectors such as manufacturing and electricity.

Additionally, the delay in kharif sowing would have some first-round

agricultural output and second-round consumption impact on the growth

momentum in the second quarter, she said, adding the pace of

resolution of various structural issues, simplification of business

and taxation rules and fast-tracking of approvals would crucially

impact the strength and sustainability of a capital expenditure

revival in the country.


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