The Narendra Modi government entered 2015 on an economic policy high. It had just tabled the Constitution amendment bill to introduce goods and service tax (GST), it had promulgated an ordinance on a new land acquisition law, it had started the process for auctioning coal blocks for which licences had been cancelled by the Supreme Court for questionable allotments during earlier governments. Apart from these big ticket items, it had also taken several small initiatives revolving mainly around ease of doing business. The government appeared to be on the right track and focused.
One year later, there’s a sense of drift. The government had to beat a retreat on the land acquisition law, withdrawing the ordinance when it realised there was no way it could get it cleared by the Rajya Sabha. The GST bill is in a limbo, which means the promise to introduce GST from 1 April 2016 has remained unfulfilled. India Inc. is still shying away from investing. Exports have recorded twelve straight months of decline. The growth forecast for 2015-16 has been revised downwards from 8.1-8.5 per cent range to 7-7.5 per cent range and the government’s chief economic adviser himself says growth in 2016-17 may be at the same levels. In other words, stagnant.
It’s not all gloom, actually. Inflation is more or less under control, the current account deficit is at manageable levels, the fiscal deficit is worrying but the increasing share of capital expenditure in government spending means the quality of the deficit is better. There is serious action on the infrastructure front, especially in roads, railways and power, which will have a positive trickle down into the rest of the economy.
So what of 2016? What are the hurdles and wild cards that the government will need to tackle in order to perk up the economy?
The main hurdle will continue to be political. The government is undoubtedly politically weaker than it was in the beginning of 2015. This time last year, the Congress was still in disarray and the opposition was not as united as it is now. But the Congress has tasted blood after the withdrawal of the land acquisition ordinance and the stalling of the GST bill and it will continue playing hardball. It has indicated that it will not allow any labour law amendments to go through. The government has, in a very smart move, brought in the Insolvency and Bankruptcy Code Bill as a money bill, which means the Rajya Sabha cannot reject it. But a money bill has to fulfil certain criteria and so this route will not be open to all reform legislation. Political management will, therefore, be a huge challenge.
The external environment will also be a source of worry, though most projections talk about a mild recovery. In October, the International Monetary Fund revised downwards its global growth forecast to 3.6 per cent from 3.8 per cent forecast in July. Earlier this week, its managing director, Christine Lagarde, warned that global economic growth will be disappointing and was also pessimistic about medium term prospects.
The risks, according to her, would come from the slowdown in China and rising interest rates in the United States.
On the global trade front, too, the World Trade Organisation (WTO) revised downwards its projections for growth in world trade in 2016 from 4 percent in April to 3.9 percent in September. This is not good news for India’s exports which have been in a slump for close to a year. Key export segments like textiles are employment-intensive and sluggishness here will have larger consequences.
The best way to neutralise this negative impact will be to give a boost to domestic demand. But a mixed picture is emerging here. On the one hand, the implementation of the Seventh Pay Commission report could give some spending boost. But rural demand will be uncertain and dependent on the rain gods. Unseasonal rains, as happened last March, and/or deficient monsoons could prove spoilers. There are already reports that next year’s wheat crop could be affected.
Any shortfall in food production and the Seventh Pay Commission payout could push up inflation. Another factor here will be global oil prices. The mid-year review of the economy expects oil prices to remain soft but this will always remain a wild card.
The Seventh Pay Commission report may boost consumption (the extent of this is debated, however) but will also pose a huge challenge for public finances. The mid-year review itself talks about the difficulty of meeting the fiscal deficit challenge in the next financial year. With private investment still weak, the government is relying on public investment to boost the economy, which again will strain the government exchequer. This is one conundrum the government will not find easy to solve, but must solve it. A slippage on fiscal parameters just won’t do.
The banking sector will be another source of worry. Both the mid-year economic review and the Reserve Bank of India’s financial stability report have red-flagged the precarious state of the sector, especially of the public sector banks. The economy cannot afford a collapse of this crucial segment of the economy.
2016 is certainly going to put the economic management skills of the Narendra Modi government under severe test.