India: New Year Old Challenges

Dr BK Mukhopadhyay

Tough challenges greet the new Government at the very dawn of 2015!

Though some silver lining undoubtedly has been witnessed in the recent past, yet complacency is out of question as the matter stands now.

India Ratings’ assesses that the economy is likely to grow at about 5.6 per cent in 2014–15 fiscal and the current account deficit no longer poses a threat to macroeconomic stability. However, the rupee’s value is not in line with improvements in fundamentals of the economy, the rating agency added. “The twin deficits are no longer a threat to macroeconomic stability, as inflation is following the glide path. Also, capital inflow is in excess of the requirements to fund current account deficit”, accordingly.

No doubt, bringing cheer on the eve of the New Year, the combined output of India’s eight core industries grew 6.7 per cent higher in November compared to November 2013 – cumulative growth during April to November 2014–15 was 4.6 per cent. The eight core industries [comprising nearly 38 per cent of the weight of items included in the Index of Industrial Production (IIP)[ has been on the move. The combined index of eight core industries stood at 166.2 in November 2014 – 6.7 per cent higher compared to the index of November 2013.  Its cumulative growth during April to November, 2014–15 was 4.6 per cent.

Coal production (weight: 4.38 per cent) increased by 14.5 per cent in November 2014 over November 2013. Its cumulative index during April to November 2014–15 increased by 9.4 per cent over the corresponding period of the previous year. Crude oil production (weight: 5.22 per cent) declined by 0.1 per cent in November 2014 over November 2013. The cumulative index of crude oil during April to November 2014–15 declined by 0.8 per cent over the corresponding period of the previous year.

There has been a 50 per cent increase in power generation between June–November 2014 and June–November 2013 – a record 15.8 per cent increase in thermal–based electricity generation in June–November 2014 versus June–November 2013 and an all–time high 14.1 per cent increase in coal production in October–November 2014 versus 1 per cent in October–November 2013 (and 8.4 per cent production growth in June–November 2014 over June–November 2013).

It is of course heartening to note that the Ministries of power, coal and new and renewable energy assured affordable, 24x7 power for all homes, industrial and commercial establishments and adequate power for the agricultural sector.  

Still, it is a fact that as a whole the industrial sector has not been in satisfactory level in the recent past in spite of the fact that India is now regarded as one of the top 20 industrially advanced economies.

Large undone things glare so far as the infrastructure sector is concerned!

The PHD Chamber of Commerce and Industry and Crisil estimated that the government would have to undertake a massive provisioning of Rs 26 trillion for the next five years, beginning 2015 to fince all its infrastructure projects to give the required push to its ‘Make in India’ project as well as put India on a growth trajectory of between 7–8 per cent. A very recent paper [brought out on ‘Infrastructure Fincing’ by the two organizations] also highlighted that policy and regulatory facilitation would have to be made effective and conclusive to liberalise investment norms for pension funds and insurance companies so that their corpus is also utilised to part–fince infrastructure projects.

Accordingly, of the estimated Rs 26 trillion amount for infrastructure projects – around as high as 80 per cent – would be needed for the power, roads and urban infrastructure. In power, generation will continue to account for the largest share of the investments, whereas in roads, investments be driven towards building tiol highways and state roads. In urban infrastructure, municipal bodies are likely to need significant investments for constructing urban roads, expanding its transport and revamping water supply and sewerage infrastructure.

Both of the PHD Chamber and Crisil held that 70 per cent of the projected investments for infrastructure fincing would have to be funded through debt, with banks remaining the largest source of fince. Rightly, exterl commercial borrowings are recommended as another source of funds.   

A lot depends on how the fincial sector performs. The Reserve Bank of India (RBI) rightly opined that government holding in public sector banks (PSBs) may not be sufficient for meeting Basel III capital adequacy norms. Recently, it has been reported that the Government of India is contemplating scaling down their holdings in PSBs to 52 per cent. This may not be sufficient to fully meet the capital needs of the PSBs under Basel III norms since the projections are based on minimum requirements. The PSBs would have to chart out a clear capital raising plan over the next five years.

It has been a fact that some major problems if not tackled in time may lead to further worse the situation. Unemployment problem continues to raise its ugly heads and all of the efforts made by the Government have been idequate. The unemployment rate at all India level stood at 3.8 per cent while in rural and urban areas it was 3.4 per cent and 5 per cent, respectively. India’s unemployment rate stood at 3.8 per cent last fiscal, with Daman and Diu and Gujarat topping the list of least unemployed among states and UTs.  

Agriculture sector has not been able to come up to the expectation level not only in India, but in the entire developing world also – without denying the fact that changes have been there over time. Importance has not been practically and adequately given effect to. But the fact remains that till now heavy dependence on this sector has been there. The odds continue to exist and time passes on.

One of the most worries in such economies has been that the high use of chemicals and machinery in agriculture is putting farmers at high risk. Compared with people in other industries, farmers faced an alarming rate of work accidents. A very recent survey [Vietm origin] showed that nearly 90 per cent of farmers do not know how to use machinery properly and 28.4 per cent do not have a proper understanding on the use of electricity.

What is more, not only India but the developing economies as a whole have also been facing rough weather due to rising tendency in the are of protectionism. The IMF Chief rightly opined that signs of increased protectionism amid deteriorating global economic conditions were “alarming”, and warned such measures affect everyone. The latest report by the WTO (World Trade Organization) is quite alarming because there is a rise of protectionism. Yes, no country is immune from the effects of protectionism. WTO Director General Pascal Lamy warned that an increase in protectionist policies across the world’s 20 major economies had hit 4.0 per cent of the group’s trade.

So, the huge tasks lying ahead call for a fast and consistent approach.

(The Writer, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, can be reached at m.bibhas@gmail.com)