A sense of cautious optimism is definitely warranted that the latest numbers for April-June 2014 augur a revival of the India growth story. A major positive is that foreign and domestic investor sentiment remains bullish. This is the key to reversing the successive quarterly deceleration in GDP growth that set in since 2011-12. After eight back-to-back quarters averaging below 5 per cent, growth was the highest at 5.7 per cent in April-June. With a better environment to do business, observers feel that matters may improve from now onwards; that this performance would be the order of growth for the year as well.
Business confidence is high as there is an expectation of a reforms blitz from the Narendra Modi-led NDA government that has a commanding majority.
The first 100 days of this regime, however, has indicated a government that is long on statement and short on implementation. There is criticism that its policy intent is incrementalist at best than bold. The difficulty that the government is encountering in pushing through reforms like higher FDI limits in insurance and pension funds from the existing 26 per cent to 49 per cent exemplify the growing gap between the heightened expectations and reality.
The finance minister Arun Jaitley, for his part, exudes confidence that the growth trajectory of the economy can be raised through better governance. According to him, most of the reforms contemplated by the NDA government don’t require legislative changes.
“Currently, I see the insurance bill is pending. Even for infrastructure investment in the railways you don’t require legislation, it is only when you go to operations, you require a legislative change. For any kind of labour laws, we require a legislative change,” he stated at a book release function in New Delhi.
Such reforms will certainly dispel the negative mood of pessimism that had gripped investors during UPA II. But they need to be implemented. Foreign and domestic investors continue to face difficulties in doing business. The government sends mixed signals in not allowing FDI in multi-brand retail. Will a FDI cap of 49 per cent in defence ensure transfer of technology? There is concern that the threat of retrospective taxation of offshore mergers and acquisitions – like Vodafone’s acquisition of Hutchison’s stake in 2007 to enter the domestic mobile telecom space — remains in law.
For such reasons, fresh investments are only slowly picking up. Unless they rebound strongly, the higher growth number in April-June may not be sustainable in the remaining months of this year. The sharp slump in spending on plant and machinery adjusted for inflation may have improved a bit in the first quarter of 2014-15 but still remains much below what was reached in the same period in 2012-13. Kick-starting more investment demand is clearly the need of moment. As noted earlier, the good news is that business confidence remains high that the Modi-led government will deliver on reform.
The bad news on growth pertains to the precarious power situation and agriculture. Reports of coal shortages that have hit thermal power generation by public sector companies are disturbing and can halt the nascent recovery in the making. The northern grid is also under serious strain. The fact that the south west monsoon has been deficient also has an impact through lower hydel power generation. For such reasons, the double-digit growth in electricity, gas and water supplies during April-June may not be evident in the coming months. This will surely hit industrial production, unless it is checked.
Poor rainfall also affects the agricultural sector, which provides subsistence to half the country’s population. That the rains were not timely for the sowing operations especially in July on which the summer or kharif crop depends will certainly be reflected in lower agricultural growth numbers in the July-September and October-December quarters. Although the share of this sector in the goods and services produced in the country has sharply declined to significantly affect overall growth, the impact is more on the demand side as the sector provides a market for consumer goods, tractors and so on.
Sluggish agricultural growth also ensures that food inflation stubbornly persists in the system. There are theories that with higher incomes people are consuming more fruits, vegetables, eggs and milk products than before. Some economists even believe that higher rural wages are exerting pressure on food prices. Even so, there is no denying that with a truant monsoon, there will be lower production. The expectation of such shortfalls fuels inflationary expectations that prove to be self-fulfilling. Higher food inflation in turn prevents the central bank from cutting interest rates to boost growth.
Nevertheless, the April-June GDP numbers are good. Services have a share of 60 per cent in the goods and services produced in the country. This sectors’ growth of 6.8 per cent alone accounts for 72 per cent of growth in April-June. Another fifth is accounted by industry that has a weightage of 26 per cent in GDP. It might be tempting to argue that the economy can easily attain the expected 5.5 to 5.7 per cent of growth this year only through services and industry. But this would be a mistake. Even though the share of agriculture is low, overall growth is not sustainable unless this sector also expands.
(N Chandra Mohan is an economics and business commentator based in New Delhi)
N Chandra Mohan
