A Many believe that burning issues like farmers’ suicides, agrarian crisis, lack of employment and other such crisis were swept by a strong Modi wave riding on nationalism and Hindutva. No one talked about the real issues like inflation and lack of quality education this time, not even Modi’s adversaries. The election was full of personal attacks, jingoism, religious slurs.
Economy needs urgent attention:
It is said that the true verdict of a government’s economic outlook could only be known when its term ends, and if it ends with the financial year, the results are often accurate. India’s financial year (2018-19) ended on 31 March 2019. And the Modi Government completed the first mandate given by the people of India in 2014 and his rule has already gone into history for two economic reasons- demonetization and introduction of GST. Since the opposition is still week and fragmented Modi is likely to win these elections again and rule for another five years.
Globally the US-China trade war and sanctions on Iran’s oil export and Saudi Arabia’ oil issues are heating up the economic scenario worldwide as every economy depends on free flow of oil. Foreign investors who invested heavily are now shying away from India, perhaps waiting for the political dust to settle down.Domestic investors are too cooling down. The US has raised the tariff by 25% which is hampering Chinese exports. If by chance it becomes permanent, then it will have a huge repercussion on global trade and global competitiveness of China. India might benefit from this step of the US, but only time will tell. Global embargo can also help manufacturing capacity from China shift to India.
The Regional Comprehensive Economic Partnership (RCEP) bloc comprises 10 Asean group members (Brunei, Cambodia, Indonesia, Malaysia, Myanmar, Singapore, Thailand, the Philippines, Laos and Vietnam) and their six FTA partners - India, China, Japan, South Korea, Australia and New Zealand.
India's trade deficit with three countries (Brunei, Japan, and Malaysia) has in fact increased marginally in 2018-19 as compared to the previous fiscal. The trade gap with Brunei, Japan, and Malaysia has increased to USD USD 0.5 billion, USD 7.1 billion and USD 3.8 billion, respectively in the last fiscal. It was USD 0.4 billion, USD 6.2 billion and USD 3.3 billion in 2017-18. This deficit with Australia, China, Indonesia, Korea, New Zealand and Thailand has narrowed in 2018-19 as compared to the preceding fiscal.
Interestingly, the trade surplus with Singapore (USD 2.7 billion) in 2017-18 has turned into deficit of USD 5.3 billion in 2018-19. India has trade surplus with Cambodia (USD 0.1 billion), Myanmar (USD 0.7 billion), and the Philippines (USD 1 billion) in 2018-19.
Industry experts have mixed views over the impact of increasing trade gap on India's position in negotiating mega free trade agreement.
The current confusing economic atmosphere has made the entire credit flow slowdown. Banks are shying away from lending due to enormous pressure created by bad loans. Though economically speaking March-April is quite low, things might improve post a noisy election and phenomenal mandate which took the Sensex to unbelievable heights.
With solid government and good economic sentiments indoor, overseas investors are now most likely to enter India for a pie in the markets.
The new focus are which was subdued during election campaign is job creation. The Modi 2.0 needs to give urgent attention in addressing this basic issue which they know is an undercurrent and can create unease.
Our economy grew at 8.2 per cent in the first quarter of 2018-19 on the back of a strong core performance and a healthy base. In the Q2, the growth dropped to 7.1 per cent and it further slid to 6.6 per cent in Q3.
The Q4 and full year GDP growth are awaited from CSO. The persisting slowdown and now the index of IIP showing contraction first time in the last 21 months and Q3 GDP growth moderating to 6.6 per cent which again is slowest in the last five quarters.
The Department of Economic Affairs's monthly report too dwelt on the slowdown. "India's economy appears to have slowed down slightly in 2018-19", said the monthly report for March.
Now the economy may grow at 7 per cent range in the current fiscal powered by the effects of the strong structural reforms such as bankruptcy laws, Goods and Services Tax (GST), crackdown on shell companies and the fiscal prudence undertaken in the last five years, as per Chief Economic Advisor (CEA) Krishnamurthy V. Subramanian.
He added that as an effect of these measures, the current economic slowdown will gradually be replaced by higher investment and spike in consumption.
He said: "We maintain our projection of a 7 per cent growth rate going forward. Given the reforms that have already been undertaken the effects will start showing after a lag. India will be able to maintain the 'fastest growing economy' tag ahead of China. We still have significant potential and scope to grow strongly given the reforms that have been undertaken."
As reported in media, the Asian Development Bank (ADB), the Reserve Bank of India (RBI) and the International Monetary Fund (IMF) have cut India's GDP growth forecast to 7.3 per cent for 2019-20. Our economy grew at 6.6 per cent in the December quarter, the slowest in five quarters, which prompted the government's Central Statistics Office (CSO) to trim its 2018-19 forecast to 7 per cent from 7.2 per cent estimated the previous month.
Industry is super enthused with Modi’s big win and will take greater risks in expanding Indian economy.
However, earlier mistakes of this govt may create hurdles in the new path towards recovery. The investment cycle had slowed down because of the dual balance sheet problem. Also, a number of corporate have significantly over-leveraged positions. The average capacity utilisation is still below 80 per cent because of the build-up of excess capacity. So, there is a slowdown in the investment cycle. Now, things may improve due to Modi 2.0.
However Subramanian is hopeful and said the last five years have seen many key structural reforms which will start showing the results. "There were some very important structural reforms that have happened. One is the Bankruptcy Code because of which the quality of investments being undertaken is changing. Earlier when the threat of bankruptcy was not there, firms could undertake capital budgeting without worrying too much about project failure. But now it has changed and they have to be a lot more careful about the quality of investments too. The effect of structural changes of IBC will start showing with some lag.”
The new government should take on the challenge of introducing reforms in areas including land and labour. The fiscal rectitude is important for sustaining long-term economic growth and is the core of long-term macroeconomic stability. Macro-economic stability is one of the things that will guide India’s high growth trajectory.
Also, the outstanding liabilities of the state governments stand at 23.4 per cent of GSDP at end-March 2017, with a range of 46.3 per cent in Punjab and 15.1 per cent in Chhattisgarh, according to an RBI study on state budgets.
Price rise & Oil issue:
The new government has another area of concern- consumer price inflation which continues to be defiant to increasingly weak public finances and pass through from higher global oil prices. From 2% in January, it has risen to only 2.9% as of April, still well below 4% - the mid-point of the RBI’s 2-6% policy target.
Media reports say that State-owned oil companies are blamed for holding on the pass-through of higher global oil prices to domestic fuel prices during the election period, even though pump prices in India are adjusted on a daily basis.
In March, President Trump issued a notice to end trade benefits to India under the generalised system of preferences (GSP), the system allowing duty-free exports to the US of about 2000 products from developing countries. This specialised status to India has been put under review on the grounds that India, supposedly the largest beneficiary of the GSP, wasn’t reciprocating with free access to its market. However, India’s commerce ministry downplayed the potential impact from this on the view that the benefits from GSP had been negligible.
The Indian Oil Corporation (IOC) has also partnered with the US and taken additional volumes from Saudi Arabia to make up for the bulk of the volumes lost because of sanctions prohibiting buying oil from Iran, which supplied more than a tenth of India's oil needs before the reimposition of US sanctions against the Persian Gulf nation stopped supplies in May.
The way forward:
Job creation in urban centres, rural employment, farmer’s income and viability of small and medium businesses should be the focus areas of Modi 2.0. There two ways to get the fund- increase the tax rates or attract private and foreign investment. Experts say that the tax rate is not a sensible approach because this will send a negative message.
The govt needs to promote efficient Small and Medium Enterprises which are the core building blocks of employment generation and growth of our economy. There is a need to improve consumption economy in the country to improve jobs opportunities and tax revenue, and for this purpose, the government of India needs to invest in infrastructure and meaningful skill development particularly, in rural and smaller regions of the country as these are the main markets for MSMEs.
The Modi 2.0 needs to reform all laws to remove corruption at a lower level and reduce transaction costs for private investments for job creation: This will boost investment in small and medium enterprises and start-ups will also flourish. This is vital for job creation because the government cannot create jobs.
Remove cartels and middlemen in agricultural sector. Govt may need to go for constitutional amendments so that a fair and open market can be created for farmers and large-scale investment in infrastructure and value creation come in the agriculture sector.
Policy reforms are a key to bringing economy to the top and to attract investments in social infrastructure. Modi must make policies to encourage heavy investments on affordable health care, education and warehousing facilities in every block and panchayat along the highways.
Skill development is another area which needs greater thruster.
The Cable Quest once gain wishes PM Modi and his new team for making India economically a great nation.