If a resurgent monsoon and decline in the international crude oil prices were part of the luck that favoured Prime Minister Narendra Modi in the first 100 days of the NDA government, the uncertainties in growth recovery in the US and Europe, and the BJP?s poor performance in the recently concluded by-polls, especially in UP, are clear signals that the coming months will be tough and testing.
While a major chunk of the problem that the economy has faced, and is still facing, is because the 10% growth was considered a given by the UPA regime, the situation on the ground now suggests that it would be better for the Modi government to keep in mind that achhe din also can?t be thought of as a given, it has to be earned through decisive steps. There is no doubt that most of the problems faced by the industry and the economy in general are those of the UPA?s making but they need to be tackled fast.
The economy requires a significant pick up in investment. According to a Deutsche Bank report, India?s incremental capital output ratio (ICOR)?it looks at the incremental fixed investment required to generate an additional unit of output?jumped from a 3-year moving average of 3.5 in FY06 to over 7 in FY14, reflecting a sharp deterioration in the efficiency of investment.
It is hardly surprising, therefore, that gross fixed investment by the private corporate sector dropped from a peak of 14.3% of GDP in FY08 to 8.55% of GDP in FY13.
A part of the slowdown in investment growth certainly can be attributed to policy uncertainty leading to the difficulties in land acquisition, delayed environmental clearances and infrastructure bottlenecks.
So, there is no other option than to revive the stalled projects to free up the productive capabilities. The key constraints here would be subdued global demand and a stressed financial sector, but that shouldn?t stop the government from fixing the policy and administrative issues that are crippling investments.
Some areas need immediate attention, and power has to be a top priority?there has been a lot of talk and inter-ministerial jugglery here in the past but to no avail?fuel shortage has led to a severe power crisis in several states in the last few weeks.
If, despite having 58 billion tonnes of coal reserves, the country has to spend $15 billion on importing coal, the story has to be grim indeed. So, it is not surprising that 16% of the country?s total installed capacity, close to 36 GW, has been running at sub-optimal capacity utilisation.
This is the situation when power demand recorded a flat growth last year. What will happen if it grows by 9-10%? It has to grow at that rate if the economy has to be unshackled from the sub-5% growth of the last two financial years.
As it stands today, the new government, like the previous one, has failed to improve the situation much on this count. Fuel availability to the power sector has mostly to do with Coal India Ltd?s hegemony. The UPA government could not do anything here despite direct intervention of the Prime Minister?s Office. A lot depends on what a stronger PMO now, with all the powers that it has, succeeds in doing.
What the government needs to understand is that inviting the whole world to come and ?make in India? is fine, but the country?s global competitiveness index (GCI) ranking has fallen from 60 to 71 in a year?the set included 148 countries in 2013 and 144 countries this year.
The frustrating part is that India is ranked below its Brics counterparts and the gap between India and China is increasing?this was a mere 14 places in 2007, but has risen to 43 now. This, clearly, puts a question mark on the feasibility of a big chunk of the Chinese and Japanese investments promised if a significant improvement in the business atmosphere doesn?t happen.
The encouraging news is, as compared to the previous regime where everything appeared stuck, the Modi government has started moving in the right direction. However, the efforts need to be sustained over a period of time so that the effects are visible. The DIPP?s ?make in India? drive will have to deliver credible results.
Doubling the number of workers at which the Factories Act becomes operational is a good beginning by the Centre but it has to also support states like Rajasthan, which initiated larger labour reforms, by clearing the changes through Presidential assent and then push other states to carry out similar reforms.
The areas where India needs to concentrate more are also listed in the World Bank?s ?Doing Business? index for 2014?India?s rank came down by three notches, from 131 to 134, in a set of 189 countries; India is ranked 186th for enforcement of contracts, 182nd for issue of construction permits, 179th for ease of starting a business, and 158th for paying taxes.
Though a number of these issues have more to do with the states (not to forget that they can also be solved to a large extent with the help of so-called cooperative federalism), retrospective tax amendments, the delay in enforcing revised gas prices, uncertainties in the telecom sector and a similar situation looming on the coal block allocations have all contributed to the mess.
The government has to tackle these issues effectively and give a clear message to the investors that it is serious about cleaning up the system and that it means business. Delays on these counts will be extremely costly.
The Prime Minister has done well in fixing the 2016-deadline for GST implementation, which puts pressure on finance minister Arun Jaitley to fix all the issues before that. A clear answer on retrospective tax amendments is also due and that needs to be announced in the next Budget.
The honeymoon period is over and the countdown has begun now. While the UPA faltered on the 10% growth target after reaching close, the NDA has to first break the 5% barrier. It will have to show the results on the ground, otherwise achhe din will just remain rhetoric.
santosh.tiwari@expressindia.com