India today, despite all her problems, is on a high GDP growth path. Recently Finance Minister Arun Jaitley said at a conference in Singapore that India is likely to grow at 7.5 per cent and already in the last quarter, India's GDP growth rate was 7.3 per cent. The Chief Economic Advisor Arvind Subramanian also announced that India can easily achieve 8 per cent GDP growth. And PM Narendra Modi reiterated in his recent US visit that India is the fastest growing economy among large countries in the world. Showcasing India's high GDP growth when others are faltering is a good strategy which the government has adopted which pushes India in the limelight.
But it is not agriculture which is fuelling growth because as is evident already, the monsoon deficit has caused much damage in Maharashtra and Gujarat and parts of Punjab. There have been a spate of farmers' suicides as a result of crop failures and there is shrinkage in agricultural growth to below 2 per cent. Vegetable prices especially onion prices are still high yet the Whole Sale Price index is shrinking and is in the negative. Consumer price or retail price index is around 3.6 per cent. But as the RBI governor Raghuram Rajan has warned, inflation could be reignited any time and this has been his justification for not reducing interest rates by a few notches.
For some time now, the Finance Ministry and the Finance minister have been pleading for an interest rate cut and the governor has declined to comply because of his fear of inflation and recently he has been warning about Brazil's case also. Brazil undertook interest rate cuts and as a result there was much credit flow into various unsustainable ventures and industries. Inflation came back and Brazil's GDP has shrunk for two continuous quarters marking the onset of recession. Credit off take however is low in India and hence it would benefit business if interest rates are cut a few notches especially the small and micro manufacturing units which require capital at low cost.
An important indicator of the health of the economy, manufacturing growth, has also been rising and was at 7.1 per cent in August . This was reflected also in the Index of Industrial production which rose to 4.5 per cent in August after being in the negative for months. Service sector growth has picked up with a rise in the growth of hotel, transport and communications which recorded the biggest expansion. Finance, real estate and insurance have also registered 8.9 and 10.2 per cent growth respectively. IT Companies' have again been hiring more people for. FDI inflow has increased but not so much as to bring about an investment boom. PM went to the Silicon Valley to woo investment and realize his dream of digital India.
It is domestic demand that is fuelling growth despite the fact that some indicators seem to be unimpressive. People do have money to spend and it is evident in the numbers going shopping in malls and bazaars and the resultant traffic jams in big cities which have become more and more frequent. Also according to some estimates, the equivalent of 50 per cent of the GDP is in Black money which is circulating and keeping business going. People with salaries and daily wages are the ones who may be spending much less as uncertainty looms in the case of some industries which are shutting down because they are facing slack demand. But according to a recent Ipsops survey, consumer confidence is higher than before. They probably believe that strong leadership at the centre will lead to policy changes and reforms which will make India a leader among the BRICS in terms of GDP growth. But demand coming from the agricultural sector, important for manufacturing growth is getting slower.
Even if we have 7.5 per cent growth, there will be problems if youth do not find jobs. One alarming indicator-- export growth-- has shrunk by 20 per cent in August and has been slumped for last seven months. Since it involves manufacturing, higher export growth could have given employment to many people.
Export slow down is not only due to slack western demand but also because of China's slow down and its impact on Asian countries which are also facing slow down. Asia is a major destination for our exports taking 50 per cent of Indian exports.
A sign that revival of the western countries has not taken off is the fact that the interest rates in US have not been raised. It will mean the FIIs will not leave the Emerging markets soon. We are dependent on FIIs in a big way so it is good news for us. Also the oil prices are supposed to remain low which is good for us as India imports almost 80 per cent of its oil requirements. Thus India perhaps should not depend on export led growth so much and start looking inward and encourage domestic investment instead. For that the RBI policy is important.
If the government is successful in bringing in money stashed abroad by various incentives and schemes that it is currently offering, it would help in people gaining confidence in the Modi government because it could be used for infrastructure. Otherwise like the UPA, this government will also seem to be only interested in wooing foreign investors and FIIs through road shows abroad. Modi government has to differentiate its policies in some distinctive way like revamping health, safety nets for the poor and bringing about an improvement in the quality of education. The government ought to pay more attention to agriculture and the distressed farmers who cannot cope with crop failures any more. They need better farm support policies and there is also the need for better upkeep of water bodies. If the government can keep an eye on how states are treating agriculture, it would benefit farmers throughout India. Irrigation facilities however have to be enhanced by the Centre. Thus even though India is on a high GDP growth path, it is increasing the welfare and happiness of the common people which matters most.
(The writer is a Senior Fellow at Observer Research Foundation, Delhi)
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