India's economy: Forging ahead?

Dr B K Mukhopadhyay

The Reserve Bank of India Governor, Raghuram Rajan, is correct in his assessment that a drop in public and private investments was the main concern about the country’s economic growth. Weak capital investment has been a key factor behind India’s struggle to realize its growth potential and with factories running 30 percent below capacity; private companies are in a little rush to make fresh investments.

Incidentally, it may be mentioned here that the RBI has already cut its growth forecast for the current fiscal year to 7.4 percent from 7.6 percent previously, well below the Government’s target of 8 to 8.5 percent (still faster than Chi).

Side by side, the fact remains that despite the slowdown in growth and investments, strong foreign direct investment and some traction in infrastructure development may encourage private investments. The central bank cut the benchmark policy rate by a half percentage point to 6.75 percent in September, 2015. But to what extent the target of 6 percent for retail inflation – which the RBI tracks to set interest rates – for January 2016 and thereafter focusing on its 5 percent target for March 2017, would be the reality remain a point to see.

The Government’s ambitious target of improving by 2017 India’s tiol ranking from a woeful 142 of 189 (below Pakistan and Iran), to the top 50, would also be tested. It will not be out of the context to mention that last year, India slipped two spots in the report, and was ranked lower than Brazil, Russia, Chi and South Africa - mainly because of delays in approvals for starting a business, tax payments, getting bank loans and property registration. Projected to grow at more than 7.5 percent in the 2015/16 fiscal year, India obviously sees an opportunity to attract more investments, especially with economic growth slowing in Chi.

On this score Onno Ruhl, the World Bank’s India director  observed clearly that “….The growth of business in India requires concerted action on several fronts - infrastructure, capital markets, trade facilitation and skills…..The stark reality is that India remains a difficult place to do business.”

Whatever it is, the silver lining should not be lost sight of. States including the top five- Gujarat, Andhra Pradesh, Jharkhand, Chhattisgarh and Madhya Pradesh — had implemented reforms in online tax payments, construction, permits, electricity connections and environmental clearances in a specified time.

Others are also coming up so far as ‘ease of doing businesses’ is concerned- Rajasthan was ranked sixth among 29 states. Several pro-business steps, such as rolling back plans to tax foreign companies and allowing them to invest more in insurance, defence, banks and other sectors, have reasons to be termed as positives. Still, it is needless to mention that India’s decision to drop a plan for goods and service tax because it lacks political support, and to roll back business-friendly amendments in the land bill, have annoyed many domestic and foreign investors.

Again, total foreign direct investment inflows into Asia’s third largest economy touched $44.3 billion in the 2014/15 fiscal year ending March, up 23 per cent compared with the previous year. It is pertinent to mention here that Temasek Holdings - the investment arm of the Singapore government – opined that with the focus on revival of investor-led growth in the country, India over the past year has been one of their “most active” areas of investment with potential for long-term returns. Ravi Lambah, co-head of India, Africa and the Middle East region at Temasek pins hope - the government has been focusing on reviving investor-led growth. To quote him: “We have been very active in India last year, and it was probably one of our most active areas of investment….We’ve been seeing potential in investing in the country on a long-term perspective. We remain optimistic that India will deliver returns over the long-term.” India currently accounts for about four per cent of the Singapore investor’s portfolio.

As per the latest report of the Intertiol Monetary Fund (IMF) India is set to decisively outpace Chi in economic growth this year, and emerge not just as the fastest-expanding economy but also as just a handful of countries to show some acceleration. The IMF has projected India’s growth at 7.5 percent this year, against 6.8 percent for Chi. While the growth outlook on India for 2016 has been retained at 7.5 percent, for Chi it is pegged 50 basis points lower at 6.3 percent.

The IMF’s World Economic Outlook states “Global growth is projected at 3.3 percent in 2015, margilly lower than in 2014, with a gradual pickup in advanced economies and a slowdown in emerging market and developing economies. In 2016, growth is expected to strengthen to 3.8 percent….In emerging market economies, the continued growth slowdown reflects several factors, including lower commodity prices and tighter exterl fincial conditions, structural bottlenecks, rebalancing in Chi, and economic distress related to geopolitical factors.” But in advanced economies, it said, the growth was projected to increase from 1.8 percent in 2014 to 2.1 percent in 2015 and 2.4 percent in 2016 - which was a more gradual pickup than what was forecast in the April, 2015 scerio.

Indian economy is witnessing “stable growth momentum” and mixed trends are seen in other parts of the world including Chi and the US, according to Paris-based think tank OECD (a grouping of 34 countries). The assessment is based on the grouping’s Composite Leading Indicators (CLIs) that are designed to anticipate turning points in economic activity relative to trend. “The CLIs continue to point to stable growth momentum in India and to easing growth in Chi.

Pegging the growth rate at 7.4 per cent for 2016, the grouping had said that decline in oil prices would reduce pressures on the current account deficit, inflation and subsidies. India has surpassed Chi to become the world’s fastest growing economy by clocking 7.5 per cent GDP for the March quarter. In 2014-15, economy grew by 7.3 per cent, accordingly.

‘Housing for All by 2022’ scheme is another prominent one so far as building durable and quality houses in rural areas is concerned . The government’s ambitious scheme aims to construct two crore affordable houses in urban areas and three crore in rural sector. Under the ‘Housing for All by 2022’ scheme, about 40 lakh houses in rural areas will be built every year. Of course the target should not be confined to build just three crore houses in the next seven years in rural areas, rather good houses should be built which would last at least 40 or 50 years.” It has been alleged that under the Indira Abas Yoja (IAY), 3.37 crore houses had been built, but these houses could not last more than 10 years as poor materials were used for construction.

The Chief Economic Advisor’s assessment definitely carries weight - “There are some signs that it’s picking up. But it’s really important that in the short-run, the economy needs policy support to boost consumption through cheaper fincing, through public investment, implementation of what we have in the budget and measures to boost private investment and kick-start all these stalled projects….So, if these things happen over the next few months, I think you can reasobly expect economic activity and growth to pick up even more.”

But it is high time that the crucial aspects are given due importance in as much as during the last 11 months exports have been going down and down, agriculture growth rate target of 4 percent still seems to be not achievable, fiscal deficit challenges still remain. Full benefits of cheaper oil prices must be reaped.  Regiol imbalance aspects are to be seen so as to rrow down the incidence. To summarize some silver lining should not make us complacent. There are many more miles to go before we catch up with the developed world!! The entire world has been keenly watching to what extent India can forge ahead.

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