1 Year of Modi Govt: Will India live up to 7% + growth rate predictions?
IMF, World Bank, UN and several other global organisations have predicted that India will be the fastest growing economy in 2015. We take a look at key pillars that the govt has strengthened in order to achieve this growth rate and analyse the areas that still need work
Published - 18-May-2015
India’s economic growth has been a talking point off late with many global reports painting a positive picture of India’s growth expectations during this year and the next few years. They have even forecast India’s growth to outpace China during this year and the next. For instance the International Monetary Fund (IMF)’s growth expectation for India in 2015 is 7.5% in comparison to China’s 6.8%. World Bank also expects India to grow by 7.5% in 2015 in comparison to China’s growth will be at 7.1%. Moody’s Analytics which is global rating agency said that India’s growth would by 7.5% in 2015. While a Harvard Study has projected India to achieve the highest annual GDP growth rate of 7.9% over the next 8 years which is nearly double of China’s growth of 4.6% in that time.
All these positive outlooks on the India’s economy have been come out recently after the new NDA government with Prime Minister Narendra Modi at the helm came to power. The economic sentiment within the country had been so far positive. However, more than positivity, it is policy decisions that drive economies. Outlooks by international organisations are based on economic reforms, policy decisions and the environment created in which business and industries can flourish. Some of the policy decisions expected by these organisations include passing crucial bills such as the Goods and Service Tax (GST), Land Acquisition Bill and increasing FDI in various sectors such as Insurance, Retail, Defence, among others. Other than this they also expect crucial investment in infrastructure projects especially those related to transport. Apart from transport infrastructure investment the progress in power generation infrastructure by the government is also expected to boost growth. The IMF also expects increase in Public Savings to a key factor in the growth of the Indian economy. Apart from this increase in Household savings and management of inflation is another key aspect that is looked at. Manufacturing is one key sector that they expect to see growth in and that will provide the necessary steam to take the growth higher. Foreign savings is one of the most crucial pieces of the puzzle to help reduce the fiscal deficit burden on the economy.
Focus on infrastructure
Right after the Modi government came into power, FDI in railway infrastructure, construction, operation and maintenance of suburban corridor projects through public-private partnerships (PPP), high speed trains, dedicated freight lines, railway electrification and mass rapid transport systems was implemented immediately. These were some of the transport infrastructure policies that were needed for growth of the economy according to global organisations.
However, several road blocks still persist in passing reforms and policies these international organisations see as crucial. For instance the GST and the Land Acquisition Act both have been stalled due to stiff opposition from other political parties. Though the GST has been passed in the Lok Sabha, it has been opposed in the Rajya Sabha. While FDI in Insurance has been increased to 49% and FDI in Defence has increased to 49% from 26% and can go up to 100% in selected cases, FDI in multi-brand retail is still receiving some resistance from many sections of opposition and even the government’s allies.
Public savings and boost in manufacturing
Public savings (government savings) is a key necessity for the economy as it helps reduce the current account deficit (CAD). The government during the interim budget itself had introduced many schemes to boost public savings. ‘Make in India’ is one such initiative launched by the government in order to boost production of goods in the country and reduce the burden on import. In the defence sector the government has cleared a deal with US arms manufacturer BAE worth $3.4 billion which includes procuring US-origin M777 artillery guns as well as the ultra-light howitzers guns could be locally produced through a partnership with a private India firm. Similarly, the government is in the process of striking a deal $20 billion deal with French jets and plane manufacturer Rafale for 36 ready jets while 90 planes to be built in India with the association of an Indian private manufacturer. While on the private sector side the government is trying to convince international companies to produce in India locally. Though the efforts of the government have been prolific very few deals to make in India have materialised by companies. However, since the campaign was launched at the end of last year it still needs more time to be seen how successful it is.
Disinvestment target missed
Another way for the government to raise its savings is through disinvestment in state-owned companies. However, the NDA led government has been slow in the disinvestment front as it was only able to meet a third of its target of $10 billion it had planned to raise through disinvestment in 2014-15.
CAD a concern?
The CAD dropping to 1.6% of the GDP from 2% in the previous quarter also comes as good news for the economy. It has reached to these levels from almost 5% of the GDP during 2011-13. The CAD however depends on other external factors such as crude oil prices, gold imports and exports, three of which have been on the rise yet again. Until some time ago, oil prices and other commodity prices were falling, regulations of the imports of gold had curbed the demand and the strengthening of the rupee to the dollar had all resulted in reducing the CAD. Recently however crude oil prices have recently increased which can be seen in the two price hikes of petrol within a span of month in May. Restrictions on gold imports have been eased and with pent up demand an upward trend in the import of gold can be expected. Finally, the rupee has been sliding against the dollar which will result in higher spends on imports and lower foreign exchange received from exports. Though the coal auctions have been successful it will take a significant amount of time for the domestic supply of coal to increase significantly, until then India will have to depend on coal imports. These all factors are expected to increase the CAD. This does not bode well for increasing our foreign savings which is one of the points needed for India to reach economic growth projected by the global organisations.
Efforts to increase household savings
Household savings is another part of necessities needed for economic growth according to global organisations. The NDA government has introduced various schemes during the interim budget to boost household savings which (gross domestic savings) had reduced to 30.1% of the GDP in 2012-13 from 33.7% in 2009-10. Some the initiatives include the Varishtha Jeevan Beema Yojana for reviving senior citizen pension plans. It also announced for new savings instrument for the girl child and a National Savings Certificate with insurance cover in order to boost interest in household savings. They had also increased the ceiling of public provident fund annually from Rs.1 lakh to Rs.1.5 lakh per annum. In addition the government also had launched the Kisan Vikas Patra to promote savings in rural areas. They are also launching the Atal Pension Yojna from June 1. The government had also launched a scheme last year to open 1.5 crore bank accounts for those who don’t have it under the Jan Dhan scheme.
Although many of these schemes have been introduced it is yet to be seen how effective they are at increasing the household savings. The increase in household savings is necessary as it reduces the CAD by providing much needed funds to the government through such schemes.
Though the new government has put in efforts to all the fronts that the IMF, World Bank and other such global monetary and economy reviewing organisations see as key areas for improvement in order to reach their projected growth estimations, the bottlenecks still persist. These bottlenecks such as delay in reforms combined with some external factors such as rise in crude oil prices as a result are creating cracks in the economic growth projected. Due to doubts and growing disappointments by foreign institutional investors (FIIs) has led to large scale selling of shares in the stock market that has seen it fall in the past few days according to media reports. This brings to question whether the government will live up to the projected growth expectations of 2015.