New York: Finance minister Arun Jaitley said on Tuesday that India’s economic growth this year could blow past estimates and tick up to as much as 8.5 percent. Part of this GDP boost is being attributed to predictions of a good monsoon this year after below normal rainfall in 2014 and 2015 had left parts of the country battling a severe drought.
The predictions seem to be much kinder to us this year, and if that were to happen, India’s economy could grow by 8-8.5 percent in 2016-17, Jaitley said on Tuesday at a meeting of institutional investors organized by Citigroup Inc. in New York.
India's met department on Tuesday forecast an above-average monsoon this year, offering hope for farmers in agricultural states like Maharashtra, Madhya Pradesh, Karnataka and some of the worst-affected regions in the country.
Agriculture employs nearly 60 percent of India's labour force and contributes 17 percent to the national GDP, so hopes of good rains bolster the case for stronger-than-expected economic growth and corporate earnings.
Adding to the optimism is the improving environment for rate cuts. The good rains forecast further enhance the case for easing monetary policy. In last one and half year, the Reserve Bank of India (RBI) has reduced interest rates by 1.50 percent and the rates can come down further if we get a good monsoon and inflation remains under control.
"If this trend of containing inflation continues, we can hope for a better interest rate regime which in turn will have a spiral effect on improving upon India's productivity," Jaitley earlier told the Asia Society in New York on Monday.
Risks to growth
It's fair to say there's been a lot of skepticism about India's GDP data since the government revised the way it calculates those numbers in January last year. Some economists say they don't see this rapid pace of growth reflected on the ground and the latest growth figures are at odds with other data for the economy, including weak exports, railway freight, and cement production.
India’s delay in delivering promised economic reforms, together with a much tougher visa regime for Indian IT professionals seeking to work in the United States, has plagued the private sector in both countries.
Jaitley admitted "one of the biggest areas of worry" has been exports: declining month after month for over a year, due to a slowdown in global demand. India’s exports fell 15.9 percent to $261.1 billion in 2015-16 while imports contracted by 15.3 percent to $379.6 billion. The trade deficit for the year was $118.5 billion. Jaitley laid some of the blame on rising protectionism in developed countries while describing the global economic situation as "grim and worrisome."
"I can tell you that developing economies being protectionist is much less worrisome than when in the most developed countries you hear noises of protectionism," Jaitley said at the Asia Society.
Jaitley's comment echo RBI's 5 April monetary policy note, which states: “Factors like the rising incidence of protectionism and competitive depreciation might have affected the export performance, since depressed global demand is common to all exporting countries.”
India's unease has grown with Republican frontrunner Donald Trump launching anti-outsourcing tirades at a time when India's IT industry is already feeling like a punching bag for U.S. protectionism. In his 2011 book "Time To Get Tough," Trump also advocates a 15 percent tax on companies for outsourcing jobs to places like India, and a 20 percent tax for importing goods and services.
Of course, everything has been far from smooth sailing for India’s IT industry even during Obama’s presidency. In December, the US Congress passed a bill named the “9/11 Health and Compensation Act” to fund continued healthcare for first-responders. To keep the dollars flowing, the Bill doubled the fee for H-1B visas for every new applicant to $4,000 and to $4,500 for every L-1 visa, which is needed for intra-company transfers.
India’s software services accounted for $82 billion-worth of exports in the financial year ending in March 2015, according to the RBI; 60 percent of that figure came from North America. These visa changes will be in force for the next 10 years and are likely to cost the Indian IT industry $400 million a year, according to Nasscom.
India is likely to struggle with exports this year against bleak global demand. The World Trade Organisation has projected growth in the volume of global trade to remain sluggish in 2016 at 2.8 percent, the same as in 2015.
Call for reforms
In his interaction with investors, Jaitley said he was making it easier for companies to invest in India, working to streamline taxes and overhauling how bankruptcy is done, and how quickly it is done, which is one of the most important points about a market economy.
The Insolvency and Bankruptcy Code 2015 was introduced in the Lok Sabha in December and will be taken up in the second part of the budget session, which resumes on 25 April, Jaitley said. He does not expect any major opposition to the bill.
India’s bankruptcy laws can take years even to make the decision to move to liquidation of a company: the new rules will try, in the fast track proposals, to conclude the entire matter in 90 days.
“GST (goods and services tax) has been cleared in the lower House and the numbers are shaping up in favour of the bill for passage in the upper House,” Jaitley was cited as saying by the Citibank note.
Jaitley has last word in one-eyed king row
Jaitley gently refuted RBI Governor Raghuram Rajan's remarks casting India as an "one-eyed king in the land of the blind." Rajan was making the point that India's growth only seemed great because other countries were faring poorly. The finance minister didn't indulge in triumphalism, but talked up India's growth while suggesting structural changes underway in India would place the economy on a stronger footing.
“India has moved from being in a state of policy paralysis to the economic bright spot of the world,” said Jaitley at the Asia Society. "Compared to the rest of the world we are growing much faster, in fact the fastest. Compared to our own potential, we can do better," Jaitley noted, while citing the need for a good monsoon and more reforms.
"If they work to our advantage, we can do much better. Assuming we have a moderate monsoon or a good monsoon, I am sure we will improve upon our growth rates but I see no difficulty in maintaining the present one because of the thrust on the kind of economic activity going on in India, public investment, foreign direct investment, increased demand," said Jaitley.
The Modi government has been telling companies to come and Make in India, and the efforts seem to be paying off with foreign investment rising. India received $25.53 billion of foreign direct investment in the 10 months to January, according to the commerce ministry. That is about 36 percent higher than the $18.75 billion investment received during the same period the previous year.
U.S. car giant Ford, which has manufacturing plants in Chennai and Pune, opened a new factory on 24 March — which cost $1 billion to build — in Sanand, Gujarat. Ford says it plans to use the Gujarat factory to triple the number of cars it exports out of India.
“We have 20 percent of our portfolio in India and it could go much higher. We pick countries first, and then we pick companies. We pick countries that are reforming because we don’t want to miss out when a full country re-rates,” says Teresa Barger, chief executive officer of Washington-based Cartica Capital which invests in equity markets of emerging countries.
Fund managers like Barger say that there's no dispute India's economy is expanding, making it a rare bright spot among emerging nations.