Event ReportsPublished on Apr 22, 2016
India to achieve stable growth rate by next year: Former Advisor to PM

Core sectors such as coal, power and steel are expected to show momentum beginning this April and hit a steady rate of growth by the festive season, according to Dr. S Narayan, formerly Economic Advisor to the Prime Minister Atal Behari Vajpayee.

Initiating a discussion on “Indian Economy in the Contemporary Global Context” at the Chennai Chapter of Observer Research Foundation, Dr. Narayan said policy interventions and budget initiatives in various key sectors, especially coal, agro–processing and agro–supply chain are expected to pay–off later in the year, boosting GDP growth to the 7.5 percent target.

He said it is difficult to predict the state of the Indian economy even over the short–term owing to several global currents and counter–currents that impinge on the economy. At a macro–level, the global growth prospect is subdued despite the uptick in the US. Persistently low global commodity prices juxtaposed with targeted policy interventions will shore up domestic growth prospects, he said.

Currency protectionism

Speaking on monetary trends, Dr. Narayan highlighted the issue of rising currency protectionism, especially among advanced economies. Central banks across the world are engaged in a dangerous and a rather constricted policy of currency inflation and deflation to protect their domestic economy and exchange rate.

While this inward–looking policy manages to strike a balance between employment, demand–creation, and inflation domestically, it creates a structural imbalance in the global economy, causing ripple effects. For example, China’s undervalued yuan has persistently kept manufacturing costs low, causing agglomeration of manufacturing capabilities in China. This has led to off–shoring of semi–skilled and unskilled jobs in several developed countries, creating a structural imbalance in these economies.

Yet another case in point is US Federal Reserve’s loose–money policy. The monetary expansion that followed the 2008 financial crisis has created a dollar glut in the global market. Nearly $ 5.6 trillion is in circulation across the globe and a large portion of this surfeit money is invested in the financial economy. Excessive cross–border dollar–flows, especially in emerging market economies, creates vulnerability in the financial system and has the potential to make or break markets, Dr. Narayan cautioned.

Elaborating on the issue of monetary expansionism, Narayan observed that this enormous volume of cash circulating in the global economy creates a structural imbalance causing asset bubbles and eventually wiping out asset values. The velocity of currency–movement in the financial economy has surpassed that of the real economy, an indication that financial flows are unsupported by asset–creation and output in the real economy. In the Indian context, cash in the economy has gone up 45 percent compared to last year. Nearly Rs. 2 lakh crore additional cash is now circulating in the economy.

Rural economy under stress

Focusing on the Indian economy, Dr. Narayan said that the rural economy is under stress. A flattened inflation, thanks to RBI’s policy imperatives, has largely benefited the urban middle class. On the flip–side, a low inflationary scenario spells reduced rural incomes, adding further strain to the severely stressed farm sector.

All rural growth indicators such as sale of tractors, pump–sets, and low–value FMCG goods have been flat in the past couple of years. Flattened out MSP, fiscal contractions in MNREGA, and reduced rural budgetary spend in the past couple of years have impoverished the rural economy. The recent Jat and Patel quota agitations, respectively in Haryana and Gujarat, could be attributed to the uncertainty in rural employment and job–creation, opined Dr. Narayan.

At a macro–level, companies have been recording substantial profits, mainly owing to reduced input costs, and not because of higher sales. Nonetheless, the biggest complaint has been the lack of growth in infrastructure. Challenges in coal–linkages, power–purchase agreements, land–acquisition, and environmental clearances have staggered the growth prospects in this sector. NPAs in public sector banks, corporate sector debt, social disturbances and oligopoly in food transmission and price discovery mechanisms are the other major challenges facing the economy, he said.

Road to recovery

Despite the several shortcomings, Dr. Narayan said the economy is on the road to recovery and will achieve a stable growth rate by next year. Coal production is already on an uptick, increased availability of coal will accelerate growth prospects in other core sectors such as steel, metallurgy and capital goods. Power transmission and distribution sector is also expected to grow substantially, partly due to increased availability of coal, but mainly due to the expected demand for high power consumption in peak summer months.

Another core sector that shows a lot of promise is pharmaceuticals. Nearly 200 drug formulations are expected to fall out of the patent regime in the next year, opening up opportunities for domestic drug manufacturers. However, this sector is embroiled in regulatory constraints, necessitating policy interventions to capitalize on the emerging opportunity.

On the rural front, Dr. Narayan expects the growth to pick up in the coming months. The current budget has focused considerably on the rural sector. Initiatives in agro–processing, such as the use of small trucks/vans to transport agro produce and digital sale of agro produce will certainly have a positive effect on the rural economy. Budgetary allocations in irrigation supported by an average/ above–average monsoon will reinvigorate the ailing farm sector. Further, centre’s focus on agriculture is expected to continue, considering that the two big agro states Punjab and UP would be going to the polls next year.

On the fiscal front, the Finance Commission’s recommended 42 percent allocation to the states has left the Centre with reduced leverage to stimulate aggregate demand in the economy. To bridge this gap, the centre will have to increase tax collection by widening its tax base, noted Dr. Narayan.

Commenting on global linkages, Narayan said that commodity prices and economic partnerships will play a vital role in determining future growth prospects (of the Indian economy). Oil prices are anticipated to go up to $60 per barrel by the end of this year. This increase may not directly impact the consumers, since the current bunk price of fuel is pegged to $70 / barrel price including the central excise duty, government may reduce excise duty to ensure consistency in market price.

Marginal increase in global commodity prices will also shore up commodity–export led economies such as Argentina, Brazil, and Russia, improving the global growth sentiment. On external linkages, close cooperation with Iran and Myanmar may benefit India both economically and strategically, opined Dr. Narayan.

This report is prepared by Deepak Vijayaraghavan, ORF Associate, Chennai.

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