Originally Published 2014-01-13 04:55:06 Published on Jan 13, 2014
India's agricultural growth had not been at the targeted level of 4 per cent in the past few years, but it was 4.6 per cent in the last quarter. Due to a good monsoon, the agricultural growth rate is likely to be higher at around 4.9 per cent. It will lead to higher demand for goods and is likely to give a fillip to industry this year.
Economic outlook to be better
" Looking ahead into 2014, we have to take stock of the past economic trends which have not been particularly good or special. Apart from a normal monsoon, there was little to cheer about 2013. Manufacturing growth fell in December and the index of industrial production declined in October. Service sector growth slowed down to 5.9 per cent due to a decline in demand for services, especially IT services, because of the slow economic recovery in the EU and the US. Service sector growth is important as it contributes to more than half of India's GDP. The rupee's depreciation could, however, help the competitiveness of IT/business process outsourcing this year.

Agricultural growth had not been at the targeted level of 4 per cent in the past few years but it was 4.6 per cent in the last quarter. Due to a good monsoon the agricultural growth rate is likely to be higher at around 4.9 per cent. It will lead to higher demand for goods and is likely to give a fillip to industry this year. A spurt in domestic demand will play an important role in the revival of industrial growth. As agricultural incomes grow, there is bound to be an increase in demand for cars, two-wheelers and other consumer goods. The stagnant investment scene has become a big problem and has also been due to the rising interest rates and uncertainty regarding policy environment and continuation of high inflation. Unless investment rises, the much needed rise in industrial production and competitiveness may not occur. New machinery and improved, innovative practices are needed for raising productivity otherwise Indian manufacturing would fall behind not only China but also smaller ASEAN countries.

Food inflation, which was high at 11.24 per cent, may come down if there is direct trading by farmers to buyers in the market. By eliminating the restrictions imposed by Agricultural Price Marketing Committee Act, the government has facilitated direct trading. This could improve agricultural growth potential and the supply of agricultural products and bring down inflation. Otherwise the RBI may be forced to hike the repo rates that would raise interest rates further, pushing up companies' borrowing costs.

After the elections, the new government at the Centre will take critical decisions, indicating the future economic policy. Until the elections no major policy decisions are expected, although the UPA government has cleared many pending foreign direct investment proposals in the last few months. The Cabinet Committee on Investments has cleared over 120 projects worth over Rs 400,000 crore. Out of the total projects over half would go to the power sector.

FDI has not been picking up at a rapid rate and even declined in 2013 from the previous year by 10 per cent (January to September FDI was at $16.85 billion). Now that the US Federal Reserve has made it clear that tapering of its monetary easing policy (that involves the releasing of $85 billion a month into the financial system) will start in 2014, this will definitely raise US interest rates from the near zero level and the US will become an attractive destination for FIIs this year. FIIs would still come if prospects of Indian industry improve and the rupee's depreciation is arrested but FIIs will not flood the emerging markets as before.

A balance of payments crisis may be averted this year with the shrinking of the current account deficit and higher FII inflows. Exports may pick up faster if the US recovery stays on track and the EU is able to overcome the crisis of rising unemployment. India's export growth did gain in momentum in 2013 but again slackened in recent months. Much more attention has to be paid by the new government to export facilitation measures and the reduction of transaction costs to enhance competitiveness. Compression of imports has been an important reason for the narrowing of the current account deficit. The fall in gold as well as oil imports has contributed largely to the decline in the current account deficit. Gold imports should not increase in 2014. The forex reserves have also grown in the last few months after being slightly depleted to defend the rupee and the rupee has reached a stable mode at the beginning of 2014.

Hopefully red tape and corruption will be reduced in 2014 with the passing of the Lokpal Bill. Various hurdles remain in the industry's perception regarding the acquisition of land for spatial expansion or mining. The new land acquisition law is very good from the point of view of rehabilitating the displaced people but industrialists may run away from financing resettlement of the displaced people. Many industrialists may look towards foreign destinations for fresh business ventures rather than go through the rigmarole of settling people. Thus there has to be further clarity regarding the land acquisition law and modalities have to be outlined and the process has to be corruption free to benefit both the purchasing and selling parties. The year 2014 may witness some additional clarifications that could give incentives to the mining industry which has been shrinking.

On the whole, the economy is likely to pick up. With the expected better governance from a new government at the Centre, faster decision-making in key areas may happen. The fiscal deficit has to be managed well and should meet the target of 4.8 per cent of the GDP. Otherwise, higher government outlay could be inflationary.

The growth forecast of most international agencies for India seems to hover over 5 per cent which is still not the optimum growth for a developing country like India where there is an urgent need to create more jobs. But it is better than 4.8 per cent growth experienced in 2013, almost half of the growth rate achieved in 2009-10.Global outlook is positive for 2014 and the UN's world GDP growth forecast is at 3 per cent. If the US recovery is rapid, it would benefit all countries, including India, due to an expansion in trade and investment.

(The writer is a Senior Fellow at Observer Research Foundation, Delhi)

Courtesy: The Tribune, January 13, 2014

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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