As 2015 draws to a close, a year-ender on the state of the Indian economy is in order. The good news continues to be the weakness in global crude prices that has seen India’s wholesale price inflation remain in negative territory. But food inflation is up, thanks to a not-so-bountiful monsoon. The NDA government hasn’t fully passed on the benefit of cheaper crude to petrol and diesel consumers at the pump as it has raised duties to garner more revenue. It needs these taxes to fund additional public investment and meet the massive obligations arising from the Seventh Pay Commission.
The economy’s prospects depend on the whims and fancies of foreign investors. Big-ticket FDI is beginning to enter the railways sector, starting with the bullet train between Mumbai and Ahmedabad. But there have been sharp mood swings among foreign and domestic investors during the course of this year. From being extremely bullish over the NDA government headed by Narendra Modi, they are not so sure anymore and even wonder whether it can deliver on the reforms front to revive the growth story. India is only statistically the fastest growing economy in the world.
The bad news is that despite having a commanding majority, the NDA’s reform agenda has hit a political barrier. The NDA has the numbers in the Lok Sabha but not in the Rajya Sabha. Reform bills may be swiftly passed in the former but can be stalled in the latter. The ongoing winter session of Parliament – and even the winter session of 2014 – has been a washout so far in passing key reform bills like the constitutional amendment to bring in a goods and services tax (GST). Last year, the Modi Government resorted to the ordinance route to overcome political opposition. This strategy has run its course.
The option of a joint sitting of Parliament to pass reforms with the superior BJP numbers in the Lok Sabha has not happened either. There is thus no escape from negotiating with the political opposition in a spirit of give and take. This opposition is not just from the usual suspects like the Left that are hostile to so-called neo-liberal reform; it emanates from the Congress Party, too, which wanted to introduce a GST when it was in power for two terms, between 2004 and 2014. They have banded together and not allowed any business to be transacted in Parliament during much of the current winter session.
The growing mood of intolerance, hate remarks by a NDA cabinet member and conversion controversies, among others, have kept the opposition united. If the ruling party indicated a willingness to negotiate on the GST, especially after the electoral debacle in the Bihar state elections, fresh controversies over the role of the Congress’ ruling family in the National Herald case have stymied such efforts. Another front has opened up with the state government of Delhi. Investors are concerned that these diversions prevent Parliament from passing reforms to boost economic growth.
With politics in command, second generation reforms thus are on the backburner. This ought to dispel a misperception that regimes with an absolute majority can push through policy change faster than, say, a minority or coalition. The truth is that reforms in India during the last two decades have been slow regardless of regime, except in moments of crisis when there is momentary autonomy from political constraints as in the early 1990s. The reality is of fierce pressures from within and outside the government to go slow on change. The Modi government’s track-record in 2015 has been no exception.
Restoring lustre to the growth story is difficult when private investments remain in a pause mode. There is talk of transformative ideas in the forthcoming union budget for 2016-17. Speculation is rife that another public investment-led push is on the cards to kick-start faster expansion. But from where will budgetary surpluses come to fund such spending? More market borrowings or a higher fiscal deficit appear inevitable. Just when a fiscal stimulus is necessary, there are demands on the exchequer for meeting the Seventh Pay Commission award, the full effects of which will be felt in 2016-17.
The economy’s fiscal outlook is “challenging”! In its latest mid-term economic review, the government said that it will stick to its budgeted fiscal deficit target of 3.9 per cent of GDP for the fiscal year ending in March 2016. It hopes to hit this target without cutting expenditure or deferring tax refunds. This is far from easy when it has lowered its growth forecast for 2015-16 to 7-7.5 per cent from 8.1-8.5 per cent estimated earlier. Slower growth will dampen the buoyancy of tax revenues when expenditures are ballooning. The Pay Commission’s tab is a whopping Rs 1 lakh crore per year!
The economy’s fundamentals have remained weak throughout 2015. The stock market has mirrored this with a sharp drop from the highs of January. The frothy markets perhaps are less and less bullish about the Modi-effect but they hugely benefit from the fact that other emerging economy destinations for foreign investments like the BRIC economies are doing much worse than India. Brazil’s economy is deep in recession. Russia is suffering from a crash in oil prices and sanctions. China is slowing down. Compared to these troubled economies India appears more stable for investors.
So far India has not been affected by the hike in interest rates by the US Federal Reserve. The much feared stampede of foreign portfolio investments out of India’s stock and debt market has not materialised as markets have already priced in the rate hike. To be sure, the RBI has the foreign exchange reserves to defend the currency. But it cannot afford to keep cutting rates and widen the differential with the US as it would encourage capital outflows. In the coming year, foreign investors and India Inc will feel assured if big ticket reforms like GST go through and the India growth story is on track on more than a statistical basis.
(N Chandra Mohan is an economics and business commentator based in New Delhi)
Also Read:
The need to manufacture more jobs
