‘Policy paralysis’ over, but economy still awaits Narendra Modi’s ‘Achche Din’

By: | Published: December 31, 2014 1:07 PM

It was suffering from 'policy paralysis' as 2014 began with some 'green shoots' here and there...

year-ender, year-ender 2014, Narendra Modi, Achche Din, Narendra Modi Achche Din, Indian economyHigh interest rate is being dubbed by the industry chambers as the single biggest factor which is holding back investment in the economy. (Reuters)

It was suffering from ‘policy paralysis’ as 2014 began with some ‘green shoots’ here and there, then a stable government came promising ‘achche din’, but the Indian economy will desperately need investments on the ground to return to its high-growth path in the new year.

The sentiments have already got a boost — since the formation of the new government headed by Prime Minister Narendra Modi — and the economy can indeed grow by over 5.5 per cent in 2015 if the ‘right noises’ get converted into real action on various fronts including ease of doing business, experts believe.

The factors helping in this objective include decline in inflation levels, continued boom in stock markets and expectations that RBI would also oblige with a much-awaited interest rate cut in the new year.

After witnessing a sub-5 per cent growth, 2014 saw improvement in economic activity with the growth bouncing back to 5.5 per cent in April-September period.

Though the year began with a low growth of 4.7 per cent in January-March quarter, momentum built up post election results in May in which BJP-led NDA won a huge majority in the Lok Sabha polls.

While various initiatives taken by the new government in the last six months are yet to yield results, there has been a distinct improvement in the business sentiments which were reflected in the booming stock markets.

The stock market benchmark Sensex has gained close to 30 per cent or over 6,000 points this year, recording its best rally in five years.

In addition, the declining prices of vegetables and softening of global crude oil prices, helped in containing inflation. While the WPI-based inflation touched zero in November, the retail inflation was at 4.38 per cent, the lowest level since February 2012.

Chief Economic Adviser Arvind Subramanian said: “There has been an improvement in economic growth as well. We were growing slow and slow for 12 quarters, that has bottomed out. And we seeing early signs of recovery, but it’s not durable it hasn’t taken hold yet”.

The key initiatives of the government which have helped improving the investor sentiments include a commitment for not resorting to retrospective amendments to tax laws and eliminating ‘tax terrorism’, relaxation in FDI policies and hike in foreign investment caps for various sectors including insurance and launch of the ambitious ‘Make In India’ campaign to boost domestic manufacturing.

Besides, the government has also initiated the process of e-auction of coal blocks, further liberalised foreign investment policy for protected sectors like defence, railways and reached a long pending consensus on GST paving the way for a single tax for goods and services throughout the country.

While announcing the decision of the Cabinet to approve promulgation of Ordinances for insurance and coal sector, Jaitley said it “demonstrates the firm commitment and determination of this government to reforms.

“It also announces to the rest of the world including investors that this country can no longer wait even if one of the houses of Parliament waits indefinitely to take up its agenda”.

The sore point for the industry, however, has been the reluctance of RBI Governor Raghuram Rajan to cut interest rates during the year.

RBI has kept the benchmark interest rate unchanged at 8 per cent since January 2014, though the inflation during the same period declined significantly.

High interest rate is being dubbed by the industry chambers as the single biggest factor which is holding back investment in the economy.

Hopefully with the inflation expecting to remain subdued at least in the short-run, RBI might effect a cut in the benchmark rates in early 2015 to trigger fresh investments, boost industrial activity and economic growth.

Pitching for easy monetary policy, Subramanian said that there is a room for rate cut and hoped that the economic growth would pick up to over 6 per cent in 2015-16 and would improve further in the coming years.

However, he added more reforms would be needed to achieve the potential growth rate of 7-8 per cent.

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