A stable government and more reforms are needed to hike growth beyond 6%.
With considerable uncertainty over the outcome of the elections, questions are being raised about India’s ability to recover from the on-going global economic meltdown. A fractured mandate and a fragile government are both associated with the slowing down of capital inflows and private investments, deferment of significant reforms and weakening of capital markets. Estimates of GDP growth in 2009-10 have come down from 6-7 per cent to 4-5 per cent in less than a month.
Just a few weeks ago, when the political scenario was not so hazy, the discussions centered around identifying the composition and priorities of the next government. With both the UPA’s and the NDA’s allies deserting them, and planning to take a firm position only after the elections, the results of the 2009 Lok Sabha elections become highly unpredictable. While it is certain that India is heading towards a coalition government, serious doubts are being raised as to whether the coalition will be a stable one since the potential allies don’t have a common ideology or approach to major economic issues.
Pushing forward economic reforms which have been on the table for some time requires political consensus. However, India’s fundamentals continue to remain strong and the potential of an economic take-off remains intact. A 5.5-6 per cent growth in GDP can still be expected in 2009-10. The economy is now close to bottoming out and from Q3 2009, a recovery process could set in. The two important determinants of India’s growth-potential — the high domestic savings rate and the large and growing domestic demand — have been dented only marginally by the global recession. This has reduced the external demand for Indian goods as well as capital inflows, and has made it difficult to raise finances overseas. India’s demographic dividend remains intact, and allows it to reap the benefits of lower manpower costs. Combined with reasonable productivity levels, this will continue to give India an edge in labour-intensive operations — global firms wanting to relocate to India will benefit from this.
To achieve a 5.5-6 per cent GDP growth (which will be significantly higher than the global average), India needs to get a 3 per cent growth in agriculture — this requires a good and evenly spread out monsoon. India has had four consecutive years of good monsoons, so we have to be particularly fortunate to have another good spell of rain. Continued rural prosperity is now linked to significant expenditures under the National Rural Employment Guarantee Act, the Pradhan Mantri Gramin Sadak Yojana, the National Rural Health Mission etc. and, more importantly, the periodic raising of support-prices for major crops. We need to have buoyant rural demand since this is what is sustaining the consumer durables industry and is vital for ensuring industrial growth doesn’t fall below 5 per cent.
A recovery in the production of automobiles, steel, cement and other core industries seems on the anvil. Various economic stimuli announced by the government, especially the lowering of excise duties by 4 per cent, is helping in raising domestic demand. The construction industry, which has a considerable multiplier effect, is responding to higher government expenditures and lowering of interest rates for private borrowers. Once the transmission of various monetary measures initiated by the RBI is complete, lending rates should fall further which will help in facilitating a larger corporate capital expenditure programme.
Along with a satisfactory monsoon, business needs a safe and secure environment. Mumbai took a month to return to normalcy after 26/11 — in a deteriorating global economic scenario, we can ill-afford any major law and order disturbance. Events across the border will adversely affect overseas investment-flows and our external business. Irrespective of who comes back to power, checking cross-border terrorism, the growing Naxalite problem in a dozen Indian states and Ulfa activities in the North East must remain a high priority.
The significant fall in international prices of oil and other commodities has enabled the Indian economy — which is heavily dependant on imports for crude and fertilisers — to contain inflation and keep the balance of payments in reasonable check. Low inflation levels augur well for higher public and private investments in India and we must hope that the global price trend remains stable till 2010.
Affordable energy prices and increased demand due to the nascent industrial revival have helped the transport sector recover. The travel and hospitality business is also picking up again after the Mumbai terror attacks. Though the IT industry and BPOs are still reeling under the impact of the US financial crisis, the services sector on the whole has been able to maintain a 7-7.5 per cent growth.
With a 55 per cent weight in GDP, a 7-7.5 per cent growth for the services sector will lead to around a 4 percentage point growth in GDP; a 5 per cent growth in industry which has a 25 per cent weight in GDP will mean another 1.25 percentage points for GDP growth; since agriculture has a 20 per cent weight in GDP, a 3 per cent growth here will contribute 0.6 percentage points to GDP — all of which means, India can safely expect around a 6 per cent GDP growth in 2009-10.
A higher than 6 per cent growth in GDP would clearly require an improved global economic environment. The economies of our major trading partners, namely, the US, UK, European Union, China and Japan in particular, need to recover to enable our export-growth to become robust. Indian companies need to raise capital to grow fast and to resume investment — for this to happen, global capital markets need to recover, as do FDI flows into the country. For this to happen, the exchange rate needs to be stable as foreigners suffer a capital loss when the rupee depreciates. In 2008-09, the rupee declined by 23 per cent, making it the second worst-performing currency across the globe. Essential imports of capital goods are being postponed and foreign debt obligations in dollars have become onerous.
Going beyond a 8 per cent growth rate is even more difficult since it requires more than just the global economy recovering. It requires major economic reforms on India’s part. This involves removing rigidities in labour laws; greater spending on basic health and school education is required so that India’s youth is healthy and employable. Deepening the capital markets for creating sources of internal-financing, financial sector reforms (especially privatisation of pension-funds), increasing FDI in insurance and opening up of banking is a necessity. Development of a corporate bond market would make available long-term finance for infrastructure, which urgently needs development. Fortunately, India’s capital markets are more open than those of China, Japan and Korea when they were at a similar stage of development. Continuing with reforms will yield long-term benefits for India.
(The author is a former secretary to the Government of India)
