1. 3-Years of Modi Sarkar; 5 key parameters that govt worked upon to push economy

3-Years of Modi Sarkar; 5 key parameters that govt worked upon to push economy

The Narendra Modi government has made an effort to create the environment for industry to get back to the growth trajectory.

Published: May 16, 2017 11:45 AM
The Narendra Modi government has made an effort to create the environment for industry to get back to the growth trajectory.

Vaibhav Agrawal

In May 2017, the Narendra Modi government completes 3 years in power. There are many ways to look back the economic performance of the government. GDP growth has been around 7.5%, definitely better than the growth rates achieved in 2012 and 2013. Inflation is well under control and so is the fiscal deficit. Stock markets have been fairly neutral in their response. Over the last 3 years, the Nifty index has appreciated by 32% implying an annual CAGR of 9.7%, which puts it at par with a debt mutual fund. But most of these parameters tend to gloss over a very important factor. And, that is; “How has the NDA government prepared the Indian economy for the big push in the next 5 years”. There are 5 key parameters.

1. GST could be the game-changer…

The passage of the GST Bill and its proposed implementation effective July 2017 is likely to have far reaching implications. It will make businesses more efficient, logistics more effective, regulations a lot simpler and in the process boost GDP growth by around 1-2%. On a GDP base of $2.4 trillion, that is an annual boost of nearly $25-50 billion.

2. Deficits well in control…

Back in 2013, the revenue deficit had almost reach 5% of GDP which triggered the currency depreciation. Today the INR has been strengthening with the deficits in control. Fiscal deficit target for FY18 is at 3.2%, while revenue deficit is targeted to be 1.9%. The current Account Deficit for 9MFY17 is less than 1% which is a recipe for sustained economic stability. Despite pressure from industry to pump prime the economy, the government has resisted the temptation to expand the fiscal deficit. That is positive for India’s external ratings.

3. Inflation under 4% could be the key to price stability…

The RBI has a key role in using interest rates to maintain stability. While a good monsoon in 2016 has surely helped, the government has also invested heavily in last mile infrastructure, rural roads, post-harvest infrastructure and creating buffer stocks to reduce supply shocks. Lower inflation is the key to RBI maintaining a dovish stance of monetary policy, which is what industry wants. The strong monsoon likely this year will further help to wane the inflation worries further.

4. Affordable housing could be the next big story…

The government has opened the doors for tapping the massive $1.3 trillion opportunity called affordable housing. According the Infrastructure status to affordable housing, giving special tax breaks, passage of the RERA Act across states and focus on infrastructure development have all contributed in creating a platform for affordable housing. In a country like India, affordable housing has a massive potential due to its multiplier effect on income and spending.

5. Demonetization was painful but it was brave…

The debate on the merits and demerits of demonetization is not yet conclusive. However, two basic advantages of demonetization cannot be denied. Firstly, it has underscored the government’s drive against black money, which is positive for the core economy. Secondly, it has set India on the digitization path that is now inexorable and will be value accretive for the economy.

The long and short of it…

Of course, there have been some core challenges for the economy. Industrial production and corporate profits are yet to pick up, which is holding back the market valuations. Banking NPAs of over $120 billion are awaiting resolution and are an overhang on corporate lending. Above all, sceptics have argued that most of the economic achievements are due to cheap oil prices globally.

To be fair, the government has made an effort to create the environment for industry to get back to the growth trajectory. The RBI has been given greater powers to deal with NPAs on a priority basis as is evident in the recent case of IDBI Bank. Lastly, if the government has benefited from cheap oil and commodity prices, they have also paid the price of 2 droughts and weak global demand.

In a nutshell, the government appears to have taken rapid strides in putting India on a higher growth trajectory. That may be the big take-away from 3 years of Modi Sarkar.

The author is Head of Research & ARQ, Angel Broking Pvt. Ltd. Views expressed here are personal.

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