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State Of The Economy

Monday, April 28, 2014
By Shanmukh Singh

The next government has a lot to do for the recovery of the economy including working on supply bottlenecks, cutting fiscal deficit, improving governance and delivery mechanism and creating an enterprise friendly environment

India is entering one of the most fragile periods in history with the economic situation being weak and a new government due in just over a months time. It hopes to come out of this fix as soon as a new government comes in. But there lie challenges in the current as well as future scenario that the new government will need to address.

Both the IMF and World Bank have predicted a swift recovery, but other major independent agencies remain skeptical of the economic prospects until the results of the elections are out. As a result of positive anticipation of the future, markets have rallied upwards and it is mainly on the basis of “a strong, favorably a BJP led, government,” says Madan Sabnavis, Chief Economist, Care Ratings.

India's economic woes have certainly gone down with decreasing inflation as well as a substantial deficit reduction. But the core structural problems still remain. If the price increase has gone down due to good agricultural growth, on the other hand, industry faces a deadlock with both IIP and HSBC's Purchasing Managers Index contracting and the domestic demand not coping up. Thus it won’t be long before we face another inflationary crisis unless the policies are brought into effect immediately by the new government.  “India's growth has plateaued in the past 13-14 months, in spite of the government and India grows at just below 5%,” says  Sabnavis.  This clearly indicates huge growth prospects for the economy in the future with an alternative government.

The Modi sarkar brings a great deal of hope to the business houses of the country and common man. Similarly, the Aam Aadmi Party brings hope of a corruption free state. And rightly so the Rahul Gandhi led Congress does not remain behind in this game; it brings in major changes to the Congress of the past and appeals to many sections of the society including the youth. But looking at the political past of India it is clear that every politician looks convincing before the election and is disappointing after it. Intentions of these leaders are hard to guess and so is their judgment.

It is clearly certain that the next government has a lot to do for the recovery of the economy including “working on supply bottlenecks, cutting fiscal deficit, improving governance and delivery mechanism and creating a enterprise friendly environment,” said Rakesh Singh, Distinguished Professor of Economics at Great Lakes Institute of Management.

 But there are many more underlying problems in the current election than just a suitable PM candidate being elected. Coalition remains the first problem. This slows down decision making and might cost a political break down to resolve the issue. This type of a political deadlock has been a major cause of the economic slowdown. The other problem is a five year term is too short for any substantial recovery in the economy. Thus a party who is elected, if it does manage to pull the economy out of the dump a continuation cannot be ensured, which creates a risk for many enterprises and institutions with another government in the future. The government as Madan Sabnavis points should be “strong”, to form a government with minimal coalition and should have the ability to rally into winning a few forthcoming elections.

Certainly in the past few weeks the economic outlook and market sentiments have been positive but that does not rule out the economic and political uncertainty that India faces.  Growth remains muted, but may not be for long though;  if the next government radically and dynamically repairs the structural loopholes created by corruption, slow decision making, slacked implementation etc.

With the right policies it won’t be long enough before we return to an eight percent growth rate, considering a savings and investment rate of 30% and 34% respectively. Even the much dreaded external sector is picking up. Exports have risen faster than imports and the global scenario seems to be improving. “It no longer is a matter of time but a matter of decision, a collective decision of the people of India on, who will be, if not a perfect candidate, a suitable guide to India's growth prospects,' is the view around the economists circuit.

Incidentally, the IMD has forecasted that the 2014  monsoon seasonal rainfall is likely to be 95% of the Long Period Average (LPA) with a model error of ± 5%. The LPA of the season rainfall over the country as a whole for the period 1951-2000 is  89 cm. This is certainly cause for worry, believe most analysts.

'Robust manufacturing needed to achieve 10% growth'
India would need a employment generating robust manufacturing sector to achieve an annual growth of 10. "If India has to grow at 9-10 % p.a, and if India has to create jobs for its very large population then to my mind we have to drive our manufacturing..It cannot be driven unless and until India becomes innovation led economy and therefore innovation has to be the backbone of India's growth," Secretary in the Department of Industrial Policy and Promotion (DIPP) Amitabh Kant said at a Ficci function on IPR, yesterday.

Manufacturing, which constitutes over 75 % of the index of industrial production (IIP), declined 3.7 % in February as against growth of 2.1 % in the same month a year ago. During April-February, the sector's output contracted 0.7 % compared with 1 % growth previously.India's economic growth expected to clock a decade-low figure of 4.9 % in FY 2013-14.

To boost manufacturing sector's growth, the government has proposed setting up mega industrial zones in different parts of the country. The National Manufacturing Policy aims at increasing contribution of manufacturing to the national GDP from current 16 % to 25-26 % by 2025 and creating 100 million jobs in the next decade.Kant also said the private sector needs to encourage more creativity, innovative efforts and inventions to achieve better market leadership and increase its competitiveness in the global market.

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