The Project Monitoring Group may have cleared R14 lakh crore worth of projects, but as rating agency Crisil’s report...
Rating agency Crisil on Tuesday said expectations from Prime Minister Narendra Modi-led government have moderated in its first year, as it was not able to push demand due to the issues it inherited.
“There were two expectations that were formed as soon as the new government came to power. One was that economy will turn around quickly and second, we could see big-bang reforms because this was the first year of the government. And, I think there has been some disappointment on both the counts,” Crisil Chief Economist Dharmakirti Joshi told reporters here yesterday.
“Since the government came to power, it has not been able to use the monetary and fiscal instruments because of the legacy issues.”
The rating agency released ‘Modified Expectations’, a report evaluating the economy-related performance of the Modi government as it completes one year in office.
Joshi said the current government inherited high fiscal deficit and inflation, which limited its functioning.
“The monetary policy has only turned favourable recently and very few banks have passed on the little reduction in interest rates. The transmission is very weak. So, monetary stimulus is not there,” he explained.
He said fiscal policy is rather restrictive as public spending is restrained by the legislative mandate to bring down fiscal deficit-to-GDP ratio.
Joshi further said: “In the first year of the government, the macro indicator has turned green, growth-inflation mix improved, the current account deficit is in check, which is a result of good policies, and one of the major gains is on the inflation front, which has eased.”
The government has also fast-tracked the decision-making process, improved ease of doing business, energised bureaucracy and taken some steps to raise growth potential of the economy.
The rating agency, however, believes that the quick turnaround in the economy is very difficult at this juncture.
“The government can’t push demand up in the short term because there is no monetary and fiscal silver bullet,” Joshi pointed out.
He said poor demand is one of the key issues that is holding up private investments. “That is why the recovery is slow, that is why investments are going take some time to pick up,” he added.
The report analysed results of 411 companies from NSE’s CNX 500 index, excluding those from BFSI and oil and gas sectors.
“For more than half the companies that underperformed, the main obstacle was poor demand. That flies in the face of the refrain that policy is the biggest bottleneck. Policy was only the number three factor according to our study, affecting just 15 per cent of the companies analysed,” the rating agency’s Senior Director Prasad Koparkar said.
He further said a gradual pick-up in consumption this fiscal will provide some impetus to demand, but it won’t be enough to raise capacity utilisation to the level where the private corporate sector will be incentivised to invest.
“Even if demand goes in FY16, it will have an impact on investments with a lag and I think we see private corporate cycle reviving only in 2016-17,” Joshi predicted.
According to the rating agency, the government has limited ability to push up demand.
“The government is attempting to support investment, but it has very limited flexibility to do that because they have constraints of Budget deficit,” Joshi said.
The agency believes the government has to pick up the gauntlet and try to push the investment cycle through public investments.
“On the legislative side, consensus is necessary to push through legislations on Goods & Services Tax and land â€“ without much dilution,” the report stated.
The agency said it’s looking forward to steps that can re-kindle agriculture growth and ease farm distress.
“India badly needs durable solutions to improve farm productivity and the government needs to sustainably address distress through crop insurance schemes rather than loan waivers,” the report suggested.
Crisil forecast the country’s GDP growth to touch 7.9 per cent in FY16, from an estimated 7.4 per cent in FY15. It sees inflation coming down to 5.8 per cent and the current account deficit at 1 per cent of GDP in FY16, given a normal or near-normal monsoon.