S. Sethuraman
A new Government after the elections stands to gain from the prospects of growth recovery taking hold with reduced external vulnerabilities, inflation getting somewhat subdued, and at least some of delayed projects going on stream during 2014. In other words, the usual refrain of the “economy in shambles” -would not hold good for a successor Government, which should address itself urgently to revival of investment for sustained growth.
India’s polls, whatever the outcomes, have coincided with IMF projecting a 5.4 per cent growth in current fiscal ending March 2015, further rising to 6.4 per cent next year. These estimates, in its latest version of World Economic Outlook, are predicated on support from slightly stronger global growth, improving export competitiveness in India, and implementation of recently approved investment projects.
IMF is no less emphatic on structural reforms – the area where the UPA Government is widely perceived to have failed and where rival BJP’s Prime Ministerial candidate Mr Narendra Modi flaunts his gusto for economic revival with his party manifesto indicative of steps to make it easier to do business and removing infrastructural bottlenecks.
A Manifesto seemingly “Modi-fied” to reflect the leader’s ideas, gets a mixed welcome inasmuch as it lacks any dramatic change from what the Congress has offered broadly on a range of reforms and tax policies. But Mr Modi is credited with ruthless pursuit of policies, if he gets into the saddle. He has stressed repeatedly on “Minimise government and Maximise governance”.
There are no doubt several significant policy pointers in purposely long-delayed BJP document like easing regulations, fiscal discipline, banking reforms and getting inflation under control while the manifesto does not also overlook its core Hindutva themes like Ram Temple. Both fiscal and monetary issues are certain to figure in the new government’s early policy moves.
And from a macro-economic perspective, the IMF outlook sees the need in India for “further tightening of monetary policy for a durable reduction” in inflation and inflation expectations. Continued fiscal consolidation would be essential to lower macroeconomic imbalances, it says and urges structural reforms to support investment, which has “slowed markedly”.
Priorities listed for India include market-based pricing of natural resources to boost investment, addressing delays in the implementation of infrastructure projects, improving policy frameworks in the power and mining sectors, reforming the extensive network of subsidies, and securing passage of the new goods and services tax (GST) to underpin medium-term fiscal consolidation.
On inflation, IMF says CPI is expected to remain an important challenge but should continue to move onto a downward trajectory. The Outlook puts CPI at 8 per cent in 2014 and 7.5 per cent in 2015. While India is among countries where policy rates were raised, further tightening may become necessary to rein in inflation.
RBI Governor Dr Raghuram Rajan is hopeful of CPI moving in line with the ongoing disinflationary process in which case further tightening is not anticipated at this juncture. In BJP circles, there is a feeling that RBI might have overly tightened the policy rates affecting investment. Reports suggested that the monetary policy area might be visited early by a BJP Government to make it more growth-supportive and also perhaps share its ideas on the broader monetary policy framework.
The policy measures by RBI and Government over the last several months to contain the high current account deficit have proved successful, and IMF notes that the pick-up in exports during fiscal 2014 and measures to curb gold imports have contributed to lowering the current account deficit.” Policy measures to bolster capital flows have further helped reduce external vulnerabilities. Overall growth is expected to firm up on policies supporting investment and a confidence boost from recent policy actions, but will remain below trend” (7.5 per cent).
India’s foreign exchange reserves have also risen above 300 billion dollars by the end of March. The current account deficit (CAD) has now been brought down to sustainable levels helped by reduction in trade deficit and capital inflows, mainly through NRI deposits. IMF has projected CAD at -2.4 per cent in the current fiscal year and -.2.5 per cent of GDP in 2015-16.
The World Economic Outlook, published ahead of the spring meetings of IMF and World Bank (April 10-12), reports some strengthening of recovery in advanced economies in the latter half of 2013 and has projected global growth at 3.6 per cent in 2014 and 3.9 per cent in 2015, the impulse coming more from the developed economies, mainly USA and the euro area, the latter gradually recovering from recession but faces deflation vulnerability.
With supportive monetary conditions and a smaller drag from fiscal consolidation, annual growth is projected to rise above trend in the United States at 2.8 per cent (from 1.9 per cent in 2013) and 3 per cent in 2015. Growth at 1.2 per cent in euro area would be close to trend while in Japan, fiscal consolidation in 2014-15 is projected to result in some growth moderation.
Growth in emerging market economies is projected to pick up only modestly. These economies are adjusting to a more difficult external financial environment in which international investors are more sensitive to policy weakness and vulnerabilities given prospects for better growth and monetary policy normalization in some advanced economies.
Though emerging economies continue to remain major contributor to global growth, “a still greater general slowdown in these economies remains a risk, because capital inflows could slow or reverse”. Emerging market and developing economies must therefore be ready to weather market turmoil and reduce external vulnerabilities”, the Outlook said.
China’s economy, recently a focus of concern for a possible hard landing due to rapid credit growth and attendant risks, is projected by IMF to grow 7.5 per cent in 2014 – same as the government’s target – but to moderate to 7.3 per cent in 2016.Growth assumption is based on gradually reining in of the pace of credit growth and Beijing’s progress in implementation of the reform blueprint.
A pick-up in global trade volumes is also underpinning the economic resurgence in general. From a lacklustre 3 per cent in 2013, world trade is expected to grow by 4.3 per cent in 2014 and to 5.3 per cent in 2015. Emerging market and other developing economies would see a 5 to 6 per cent rise in trade growth over these two years while global consumer prices are also to moderate slightly.
Altogether, the global environment is not so unfavourable as India settles down, after the world’s biggest election, to tasks of governance in the next few weeks. (IPA)
Follow our WhatsApp channel