While financial markets have given a big thumbs up to India’s strong political mandate and business-friendly new government, the underlying economic activity continues to remain weak. One of the drags on growth this fiscal was sub-normal monsoon that has pulled down the kharif output by 7.0%.
Even the rabi sowing so far has been below normal. Even if its share in India’s GDP has declined to around 13%, agriculture still provides a strong support to its economy from the consumption side. The recent weakening of private consumption expenditure and a faster dip in rural retail inflation (as compared to urban retail inflation) to a large extent reflect weakened farm activity.
With the resurfacing of weaknesses in global demand and India’s overvalued currency in terms of REER (real effective exchange rate), its exports growth (average) has fallen from 10.0% in Apr-Jun to close to zero percent in Oct-Nov, 2014. Unfortunately, this is happening at a time when the government is pushing its campaign of “Make in India”. While current account deficit as a ratio of GDP is still manageable, the only way to manage it durably is through sustainable exports earnings and foreign direct investment (FDI) inflows. The FDI into India during Apr-Sept, FY15 were at $ 16.76 billion – still much lower than their level at $ 21.87 billion in Apr-Sept, FY12.
Industrial growth continues to remain weak due to weak manufacturing activity and contracting capital goods industry.
Bank credit growth so far this fiscal has slowed to just 2.68% – its lowest level in the past 16 years at least. This shows sustained weakness in investment demand. While public sector banks have become highly risk averse, private banks have been lending selectively. The loans extended by them are primarily working capital loans, as not many companies are inclined to undertake fresh investments. Companies raising money through ECBs are also using these funds to retire the rupee debt rather than make any fresh investments. On the positive, some concrete steps have been taken by the new government to reduce red-tapism and improve administrative efficiency.The E-biz platform and the Digital India campaign are helping a great deal in integrating all government departments and services. Some tough decisions in the form of controlled increase in the MSP of farm items and rural nominal wages, deregulation of diesel prices and partial increase in railway freight and passenger fares, etc. have also been implemented. But many ground level issues faced by industry are yet to be resolved. While the Cabinet has approved an ordinance on insurance bill and the re-promulgation of the coal ordinance, etc., the issues surrounding the GST bill still linger.The government’s preparation for new coal auctions to reduce fuel shortage is observed to be beneficial only to the stuck power projects. According to the industry experts, even the stranded power projects may take another two to three years to start operations and weak financials of power companies deter fresh investments. The SEBs have still not aligned their prices to reflect true cost pressures. Other serious worries are — delayed road projects, tedious dispute resolution mechanism, congested ports, lack of incentives for R&D, continued uncertainties over land acquisition and labour laws, etc.
Most of the above-stated, politically sensitive issues fall within the jurisdiction of states and the centre is facing obstruction as the BJP does not have a majority in the upper house. This means structural reforms will remain slow and important legislations may get delayed.
By Rupa Rege Nitsure
Chief Economist, Bank of Baroda