A year after the Modi Government assumed office, the economy seemed to be warming up like a long distance runner — who consigned to the sideline of obscurity for ages — has been suddenly given a chance to perform the dream run of his life. The runner has still not broken off the pack, but there are unmistakable signs he was here to stay and prove that future belonged to him.
Ironically, those who condemned him for his sluggish pace and supine inertia are now his biggest cheerleaders. The World Bank (WB) and International Monetary Fund (IMF) as well as several other respected international financial institutions have predicted that India will pip China as the fastest growing economy in the next two years.
Of course, there are still not many takers for Prime Minister Narendra Modi’s tall claim that Indian economy will grow to the size of $20 trillion from the current $2 trillion, but the fact remains that there is an international consensus that India is set to emerge as an economic giant, which sooner than later will force its way to the high table of the elite world powers.
The change in the economy is visible both at micro and macro levels. last week the Finance Ministry came out with a report stating that the fiscal deficit was contained in 2014-15 at 4 per cent of the GDP — in currency term amounting to Rs5,01,880 crore. This is an improvement on the target of 4.1 per cent. Similarly, the revenue deficit was checked at 2.8 per cent of the GDP (Rs3,58,306 crore), which is fractionally lower than the target of 2.9 per cent.
For global investors and major funds managers, who look for nothing more than improvement in fiscal consolidation, the number provides a clear signal that the Indian economy was turning the corner. For 2015, Finance Minister Arun Jaitley has aimed to contain the fiscal deficit at 3.9 per cent of the GDP.
The Government can also take credit for the fact that last year saw a huge 56-per cent jump in the foreign direct investment (FDI) inflow in India. The Foreign institutional investor (FII) inflow has been positive but inconsistent and opportunistic, but the domestic institutions have aggressively taken part in the capital market. The return of the domestic institutional investors (DIIs) is also indicative of the growing confidence of the middle class that the Indian story is not a one night stand.
The thrust of the Modi Government in the first year has been on laying the policy foundation for unleashing the potential of the economy. The Government raised the FDI cap in insurance sector to 49 per cent from 26 per cent, allowed FDI in Defence production, and continued with the UPA’s fuel subsidy reforms by removing diesel subsidy. The initiative to provide targeted cash subsidy for social sector schemes through Aadhar-linked bank mechanism could also be a game changer in weeding out corruption and bringing down cost.
The Government is also considering a slew of steps to bring down the import subsidy in case of fertilisers. This is a huge burden on the resources as the expenditure involves surpasses Rs1,00,000 crore.
The Centre took a major step last year to provide greater fund in the hands of the States by accepting the 14th Finance Commission report and disbursing 42 per cent of the total tax collection to them, ten per cent up from existing 32 per cent. Of course, this has come with reduction of Central subsidy in many Centre-sponsored schemes, which the States are protesting.
As in the past, the political differences on several key issues are coming in the way of pacing up the reform process. The Manmohan Singh Government failed to revive economy as much due to plethora of scams that shook the confidence of the global investors as due to sharp political divide that stalled every possible reform initiative.
That legacy now dogs the Modi Government. Had the BJP backed the GST, insurance sector reform, and several other key policy measures during UPA regime, the country could have been better placed to leverage its vast potential. The present stalemate in Parliament on reform measures gives a sense of déjà vu and a major challenge to the Government in carrying forward its economic agenda.
In addition, global challenges like Greek crisis, unending cycle circle of violence in the Middle East, border tension, Russia’s standoff with the West and the wobbling Rouble, keep surfacing on every step and need to be accounted for.
Obviously, a lot of work remains. Several aspects of economy have worsened during the last one year despite much hype and hoopla by the Government. In the months ahead, the Modi Government will be required to turn the perception of change into reality by delivering on its promises through speedy execution of projects and reviving the comatose sectors of economy.
A cursory analysis of the March quarter result shows that steel, public sector banks, power, infrastructure etc, continue to remain under major stress. However, the positive performance of companies like Nestle, Britannia, HUl, Marico, Dabur, Gillette, Jubilant Food show there is a revival of non-discretionary spending.
After huge decline the Tata Steel profit for the last quarter, the industry hopes that the Government will now take step to provide iron ore linkage to the plants and bar China and Russia from dumping their cheap steels in the Indian market.
The industrial production has also declined sharply and natural gas production has fallen by 3.6 per cent to 2.669bn cubic metre in April compared with 2.769bn cubic metre in the same month last year. Crude oil production has dropped by 2.7% to 3.02mn tones in April against 3.10mn tones in the same month last year.
The Government will also have to take steps to revive the export sector. Due to falling global demands, the India exports have been on decline for over 15 months. This is unlikely to change any sooner. Here comes the difference between RBI Governor Raghuram Rajan and Prime Minister Narendra Modi.
Rajan has advocated that the country’s economic thrust should revolve around the slogan of “Make for India” while Midi has pitched for “Make in India”. While the RBI Governor feels that India’s economic growth should be inward looking, Modi has a global game plan to take advantage of India’s cheap labour and give China a run for the money in manufacturing sector. The discordant voices between the top brass of the Government and RBI are not something that global investors like to hear so often.
The Government also needs to take quick steps to perk up tax collections. According to the data released by the Finance Ministry mid-May, gross tax collections rose by 9 per cent in 2014-15 which is lower than the revised estimate.
The Government’s handling of minimum alternate tax (MAT) issue was seen as a source of major embarrassment. The Finance Ministry first quoted a staggering Rs40,000 crore as tax due of the FIIs and then reduced it to Rs 600 crore when the hot money began to leave India, stock market collapsed and rupee deprecated. A greater transparency on tax issues will go a long way in assuring both the Indian corporates and foreign investors to believe in the longevity of the Indian story.