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Economic challenges galore before India

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  25 Jan 2016 12:00 AM GMT

The ongoing turbulence in global economy is causing jitters in the Indian markets though the Central government as well as business leaders remain guardedly optimistic about the country’s prospects. The Chinese economy is continuing to slow down, the US Federal Reserve has raised interest rates for the first time in nearly a decade, the European central bank is hinting at a stimulus package with the Eurozone growing at a sluggish 1.6 percent last year even as the refugee crisis in Europe remains serious, oil and commodity prices are crashing worldwide with oil prices once dropping below 30 dollars per barrel, spooked investors are withdrawing funds from emerging markets to favour safe assets like gold and government bonds. Apart from India, other members of the BRICS grouping are not doing well lately with Brazil, Russia and South Africa all in recession. The biggest worry remains the state of the Chinese economy which has been accounting for nearly one-third of the world growth in the past decade. According to the World Bank, each 1 percent fall in Chi’s growth rate will cut growth rates of other Asian economies by about 0.8 percent. A section of Chinese economic magers are reportedly saying that it is no longer possible for their country to maintain double digit growth — that a growth rate of about 7 percent may be the ‘new normal’. This is in line with the 6.9 percent growth clocked last year which was Chi’s slowest in 25 years. The slowdown in the Chinese economy is inevitable as it is undergoing a wrenching readjustment with Beijing now according highest priority to cut housing stock and lower excess industrial capacity.

This is a painful aftermath of the bursting of the debt-fuelled property bubble in Chi last year, followed by a sharp downturn in its share market and a run on its currency yuan. So where does all this turmoil leave India? At the World Economic Forum annual meet in Davos recently, Fince Minister Arun Jaitley said that the Indian economy can still ride out unscathed through this gloom if it keeps up ‘reforms and responsible economic planning’. Pointing to the programme of public investment being undertaken by the Central government, particularly in infrastructure, Jaitley called for ‘multiple engines of growth’ to power the country’s economy. With the beginning of the New Year, the World Bank had forecast India’s growth at 7.8 per cent in 2016-17, while the UN’s World Economic Prospects 2016 report had pegged its growth rate at 7.5 percent. Jaitley has expressed confidence that the Indian economy can still go faster, adding about 1-1.5 percent to its growth rate, but has also admitted that ‘ease of doing business’ remains an issue and more needs be done on this front. Whether the country can withstand a global economic slowdown like the one in 2008 depends on how it broadens its base; it needs to put greater thrust into manufacturing and creating industry jobs, thereby alter its primarily services-driven character, a cross-section of business leaders feel. In particular, boosting the farm sector and encourage more avenues of non-farm income in rural areas should be a priority for the NDA government, if it does not want to fall again into the trap of ‘shining India’ growing only in prosperous enclaves — which badly hurt the previous NDA government led by Atal Behari Vajpayee.

In the run up to the general budget this year, there is already much speculation whether the rendra Modi government will be able to limit fiscal deficit within 3.7-3.9 percent, when it is projected to touch 4.1 percent. There are also questions about how high the government will set its disinvestment target this time, when the earlier target of Rs 69,500 crore for the 2015-16 proved to be way too unrealistic. The government has also been easing foreign direct investment (FDI) norms in sectors like defence, civil aviation, construction and media, but the current bearish sentiments in the market has belied hopes of higher investment in the near future. With a World Economic Forum report warning of over 5 million job cuts worldwide in next five years, the NDA government has a tough task on its hands to keep the job market healthy, when its planned labour legislations are expected to encounter stiff resistance in parliament. The Fince Minister has also pinned his hopes on getting the proposed Goods and Services Tax (GST) Bill pass the Rajya Sabha hurdle this year when the numbers in the Upper House are expected to change in the NDA’s favour. The country’s economy may presently be one of the few bright spots in the global backdrop; but falling corporate earnings, downturn in private investment and sluggish capacity utilisation are worrying domestic signs. The Assocham has suggested that consumer confidence can only return if more job opportunities are created through higher investment into areas like construction, infrastructure and manufacturing. While this is the need of the hour, India needs to avoid the pitfalls that Chi has fallen into — due to state sponsored investment crossing safety limits to create infrastructure and capacity now lying unused and unwanted. The parliament also needs to pick itself up and function by keeping the country’s economic interests foremost in challenging times.

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