By S. Sethuraman
As the slow-grinding economy enters the second half of fiscal 2015, a tinge of optimism pervades policy-making circles in Modi Government that recovery would now begin to gather some steam to hit at least a minimum of 5.5 per cent GDP growth, in a distinctly improving macro-economic environment.
Prime Minister Narendra Modi has now put in place a new economic team to impart the necessary momentum to strengthen macro-economic stability and set in motion the reform agenda to turn India an economic powerhouse. Notwithstanding whatever socio-economic measures taken by his Government so far, much work remains to be done to get corporates to act to invest, notwithstanding claims thus far made on making “Doing Business Easier”.
Five months into office with a resounding mandate, Prime Minister Narendra Modi has used the political capital demonstratively on so many “Yojanas”, undoubtedly development-focussed, but which have no pay-offs in the short-run while skirting round the basic issue of economic revival. He also returned to his campaigning mode for two weeks in Maharashtra and Haryana. All this may have detracted from the promise he had held up, of ushering a bold change, in terms of investment, growth and jobs.
Mr Modi, however, cannot be faulted on “maximum governance and minimum government” for, with his tight control over all Ministries and wielding maximum authority, once policies are decided, implementation would not be allowed to suffer. Nevertheless, all expectations on hard core reforms taking off are now being linked to the next Budget in February 2015.
Mr Arvind Subramanian, internationally-renowned economist, has taken over as the new Chief Economic Adviser (CEA) while Mr Modi, as part of a big shake-up in top echelons of bureaucracy, also brought in Mr Rajiv Mehrishi from Rajasthan as the new Finance Secretary in place of Mr Arvind Mayaram. Mr Mehrishi is credited, as Chief Secretary in Rajasthan, with having put through reforms in land and labour laws at the state level.
Mr Subramanian has been an ardent advocate of pro-market reforms and feels honoured to serve a Government with “a mandate for reform and change”. Two immediate priorities he has outlined are macro-economic stability and “creating the conditions for rapid investments and growth”. The new team has to steer the economy through the still critical second half of fiscal 2015 at home amid a worsening global outlook with risks of disinflation and deceleration in growth worldwide.
Through most of October, international financial markets had remained highly volatile with huge self-offs, especially in the US Market, as fears were building up about faltering global economy, with a crisis in euro-zone in near recession and deflation, slowdown in China and the uncertainties about timing of US Fed moves on monetary normalisation which has already caused a spike in US interest rates. The sharp fall in oil prices below 85 dollars a barrel in mid-October added to a sense of global weakness. By October 17, US market seemed to have recovered to normalcy.
Meanwhile, the confidence about growth picking up in the coming months rests on the assumption that the steady downtrend in headline and CP inflation of recent weeks would stabilise at a low and stable level also aided by the fall in global oil prices which should accelerate decontrol of diesel prices and contribute to achieving the targeted fiscal deficit reduction (4.1 per cent of GDP) in 2014 and also keeping current account deficit within manageable limits.
In September, the Wholesale Price Index (WPI) declined to a five-year low of 2.38 per cent – essentially due to softening of vegetable and food prices, and the base effect is seen in the annual rate of inflation at 7.05 per cent in September 2013. It also reflected falling oil prices to some extent. CPI, the benchmark index which guides RBI’s monetary policy, had also softened to 6.46 per cent in September though the combined food price inflation was 7.67 per cent, still a drop from 9.35 per cent in August 2014.
Other data were weak. Industrial slowdown continued in August with growth negative in manufacture, especially in capital goods and consumer durables segments. Overall industrial growth in the first five months was stuck at 2.8 per cent. Nor on trade, was there cheer, with exports showing only a modest rise in September while imports surged with larger imports of gold and ores and minerals, leaving a monthly trade deficit of 14 billion dollars.
Inflation targeting to guide the monetary policy stance has been a contentious area with the Finance Ministry sometimes and business and industry always differing whenever RBI makes an upward revision of the policy-lending rate (repo), which stands at 8 per cent since January 2014. RBI awaits a firming up of disinflationary path as a resultant of supply-side measures by Government apart from effective control over fiscal deficit and impact of other domestic and global factors.
It is now proposed, even as the Urjit Patel Committee recommended, that a Monetary Policy Committee would by constituted by Government they would fix a target with a band to guide the broad policy for RBI to follow. Now, there are undoubtedly differing perceptions on the set-up of the decision-making Monetary Policy Committee and the extent of autonomy that RBI would continue to exercise within the objectives set by Government.
Dr Rajan has said all the issues are being discussed between FM and RBI and he did not see any conflict between RBI and Government or that the bank’s independence was under threat. The central bank’s objectives, he said, included an inflation band, financial stability and growth. Both fiscal and monetary measures were necessary to contain inflation and achieve growth targets. Still issues remain for final decision, such as the composition of the monetary policy committee, its scope, and what say the RBI Governor will have in all this as well as the degree of autonomy for the central bank. (IPA Service)