Originally Published 2014-09-16 00:00:00 Published on Sep 16, 2014
India may exceed the growth forecasts of the IMF and the World Bank but the task ahead is not easy, especially with 10 million jobs to be created, so much cleaning up to be done and so many disasters to be tackled.
India: Hope for economic turnaround

There is hope in the air about the much awaited economic turnaround. The second quarterly GDP growth rate (April to June 2014) was at 5.7 per cent which has kindled expectations that good days are ahead! There is hope that India will once again be the most attractive destination for investors. Indeed in Asia specially, India is fast becoming one of the best investment destinations because of the improved growth prospects. Japan has recently pledged $35 billion investment for India. Is it true that India is really turning around under Prime Minister Narendra Modi?

If we look at the world as a whole the forecasts by the IMF are not so good. In July, it warned that geopolitical risks in Ukraine and the Middle East are looming over a global economy already hit by the slowdown in the US and China. The USA's growth rate, however, has picked up and was at 4.2 per cent in the second quarter of 2014. The IMF has pointed out that the global economy is expected to grow only by 3.4 per cent this year. The world economy grew at 3.2 per cent in 2013.

Russia, which is the target of the US and the EU economic sanctions for its role in the separatist fighting in Ukraine, is likely to see its economy brought to the brink of recession this year. Its growth is likely to be only 0.2 per cent. The sanctions could have a severe impact on trade in the region, particularly in eastern, central Europe and central Asia.

The EU is also steeped in unemployment and deflation. The 18 members of the eurozone (which have euro as a common currency) registered zero growth in 2013. Japan is facing a decline of 7.1 per cent in its growth rate. China's growth rate has improved recently due to the stimulus package given by the government and its GDP growth forecast by the IMF is at 7.5 per cent. Australia's GDP growth is at 2.7 per cent and South Korea is growing at 3.8 per cent. Singapore is facing a slowdown with 2.4 per cent GDP growth.Looking at Asia-Pacific, India's growth rate does seem good. If India's upturn in GDP growth could be maintained and a higher growth rate could be achieved at the end of 2014-15, it would definitely attract more investment.

According to the IMF, India will grow at 5.4 per cent and according to the World Bank at 5.5 per cent. But the OECD says that India's growth rate will be at 5.9 per cent by 2015. Yet for a higher rate of investment that is required for stimulating growth, India will have to improve the investment climate. India still ranks low at 134th position in the World Bank's 'Ease of Doing Business' index. Modi can change the investment climate by cutting red tape, reducing corruption and building efficient infrastructure.

On the trade front, due to the slow growth in the US, the EU, China and Japan, India's export growth could be sluggish.

A decline in crude prices, however, could be good for business as it would bring down energy costs and rein in inflation. The bottom line, however, is: how fast the government brings down the rate of inflation which is eating into the savings of the 'common person'. If Modi is able to do so this year, interest rates could come down.

Like China we have a huge market, and we must encourage domestic investment and trade which will reduce inequality. If interest rates are lower, more domestic investment would come forward in manufacturing and job opportunities could be created. Manufacturing growth, which is labour-intensive, is most important for creating jobs. A higher GDP growth of 9 per cent could have jobless growth like in the past if industrial growth is capital intensive.

The recent quarterly GDP growth of 5.7 per cent does show an increase in manufacturing growth which has risen to 3.5 per cent after posting negative growth in the previous quarter. It is also based on high service sector growth, especially in financial services, which rose to 10.4 per cent. Construction growth has picked up as well as mining growth which has risen to 2.1 per cent. The generation of electricity, gas and water supply has risen by 10.2 per cent. There has been a big jump in the community and social services from 3 per cent to 9 per cent. This is due to higher government spending which may not be sustainable in future, given the fiscal deficit constraint that has to be met.

There is some not-so-good news. The actual credit offtake has been weak and so is the tax collection. The sale of commercial vehicles declined in Q2 by 10.1 per cent over the previous quarter.

Agricultural growth has also not picked up which is not a good sign. It has slowed down from 6.3 per cent to 3.8 per cent. Due to an increase in rainfall across the country the monsoon deficit has shrunk to just 11 per cent. Still one can expect some rise in food prices in the next quarter unless the government takes ample care to release food grains from the FCI. Rice and wheat experienced a growth rate of 15 and 2.6 per cent in the Rabi season of agricultural year 2013-14.

Basically all the reforms that were promised have to be carried out to restore the confidence of investors. There has to be skill training, quick clearances as well as social sector reforms in health and education. These will only improve the ease of doing business. Structural reforms will have to be quick to meet the expectations of prospective investors. The coal crunch that the power sector has been facing may remain a problem in the future.

India may exceed the growth forecasts of the IMF and the World Bank but the task ahead is not easy, especially with 10 million jobs to be created, so much cleaning up to be done and so many disasters to be tackled.

Courtesy: The Tribune, September 16, 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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