Inflexion point

From a state of euphoria over the prospects of the Indian economy a year ago, the mood is distinctly subdued today. This is despite the fact that there is no dearth of encouraging signals. The fiscal deficit is on track to achieve its 2015-16 target of 3.9 per cent of GDP, the current account deficit is below 1.5 per cent of GDP, the economy is slated to grow at 7-7.5 per cent this fiscal, going by a range of projections, and consumer price inflation at about 5 per cent is no cause for anxiety. Perhaps, no economy in today’s recession-hit world can boast of such macro numbers (with China falling below 7 per cent), which is why India has emerged as a leading draw for foreign direct investment in 2015. FDI inflows in January-June this year were $19.4 billion, 30 per cent higher than in the same period last year. But there are creeping concerns over whether India can sustain or improve on its current level of growth. RBI Governor Raghuram Rajan recently said in Hong Kong that “the central concern is with investments. Private investment has fallen back quite a bit and so has public investment.” Moody’s has struck a note of cautious optimism, forecasting a growth rate of 7 per cent in 2015-16 (against its 7.5 per cent estimate made earlier) owing to a weak monsoon; this is lower than India’s 7.2 per cent growth in 2014-15. A worrisome feature is that exports are in free fall, which implies that domestic demand must rise to plug the gap.

The demand indicators present an intriguing picture. Petrol and diesel consumption is looking up, but not the sales of tractors and FMCGs, which mirror rural demand. Diesel consumption, a reliable macroeconomic indicator, was up 7.1 per cent in April-October. Electricity output has picked up in August and September. However, the recently released quarterly survey by the Labour Ministry on jobs generated across a sample of over 2,000 manufacturing and services sectors points to a fall in the rate of employment generation between June 2014 and March 2015. It is not clear whether the situation has improved since, coinciding with the slight improvement in industrial activity.

A boost to infrastructure with a focus on rural India will increase demand and ‘crowd in’ private investment, as would a focus on supply-side bottlenecks. The Centre has displayed the right intent by lifting FDI caps, drawing up a new bankruptcy code, and getting infrastructure projects going by easing funding constraints. To ease disputes settlement, it is working on a new arbitration code, which could improve its ‘ease of doing business’ ranking. Rather than lose its way in acrimony, the Centre should work with the Opposition this Winter Session to get crucial legislations such as GST passed soon. But, equally important, politically non-controversial moves should be rolled out fast. The economy is at an inflexion point, as a higher growth path beckons. The next few months are crucial; the world is watching.

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