Dear Modi, there is indeed progress but this is not time to celebrate

Prime Minister Narendra Modi speaking at an event organised by Bloomberg on Monday (28 March), fiercely defended the economic growth his government has achieved in the first 20 months of his rule that followed the UPA days.

Modi refuted the criticism that the growth is more on account of factors such as fall in crude oil prices rather than his government’s growth-oriented policies. “The fact is that India’s economic success is the hard-won result of prudence, sound policy and effective management... this is the result of good policy, not good fortune,” Modi said.

There is indeed evidence of progress across some segments. If one looks at the 20 months since Modi took over, inflation has come down to the comfort zone of the Reserve Bank of India (RBI), fiscal deficit — a widely tracked parameter to assess an economy’s stability — is under control, public spending — critical for growth — has picked up and consumer demand is improving.

 Dear Modi, there is indeed progress but this is not time to celebrate

PM Narendra Modi. Reuters

The Modi government’s policy to relax foreign direct investment in certain segments has resulted in higher inward FDI flows. There are signs of pick up seen in the consumer segment translating into higher car sales an consumer durable spending.

But, still, there are many grey areas in the picture of India’s ‘economic success’. The economic growth or economic success, as depicted by the GDP numbers and for which the Modi government is hurrying to take credit, is still being questioned by economists. Some of them, such as Deutsche Bank economist Taimur Baig, strongly argue that the 7.6 percent growth the country logged in the fiscal year ending March is a myth since industrial growth has not picked up to the desired extent, bank credit growth to industries — an important indicator of economic revival — is at multi-year lows, exports have shrunk for 13 consecutive months and rural stress remains high due to failed monsoons.

Modi is not, evidently, taking this criticism in its stride. He, instead, seems to be looking at the critics with disbelief. “Obviously, there are some who find that (India’s economic success) difficult to digest and come up with imaginative and fanciful ideas to belittle that achievement,” Modi said speaking at the Bloomberg event.

His refusal to accept criticism and instead call them “imaginative’ and fanciful” cannot be justified since there is indeed merit in the factors highlighted by the economists as impediments to growth.

There are serious concerns on the pick-up in manufacturing growth on the ground. The government assumes that the manufacturing growth is 9.5 percent in FY16 compared with 5.5 percent last year, whereas the average IIP until January this fiscal shows 2.7 percent.

“How quarterly GDP growth can be over 7 percent year-on-year, with manufacturing apparently rising by 12% when high frequency data show low single-digit industrial production growth, a large double-digit decline in exports, a very-low capacity utilisation rate, and ever-declining earnings growth, we frankly don’t know,” Baig is quoted in a Bloomberg article.

Also, there is significant uncertainty with respect to the course of inflation especially that of food and vegetable items and pulses. The RBI has comfortably met the 2016 January target of CPI inflation (6 percent) but most economists expect the central bank to face major challenges to lower it to 4 percent target for 2017.

The fact is that despite the early signs of improvement in the economy, there is still stress on the ground. The biggest evidence of this is the stress on the books of banks.

With total bad loans plus restructured assets about 11 percent of the total bank loans and no significant improvement on stalled projects, not all is well yet on the ground. Add to this the muted private investments scenario, the economic picture is far from that of ‘success’ at this point. These are the reasons why economists keep questioning the GDP numbers and refuse to acknowledge that economy has indeed turned the corner.

Also, on the reforms front, there is still a lot of work to do. Though the NDA can keep blaming the opposition for stagnation in the large ticket reforms process, the report card shows that no big reforms have taken place yet.

The GST is still a subject of debate with the Congress blaming the BJP for not responding to its demands. Similarly, the promises of easier land acquisition and freeing up public sector banks from state control are yet to see any progress.

The IMF has warned that India will have to pay a price if it fails to progress on the reforms front. Surely, the Modi government has done good work in the areas of FDI liberalisaion, subsidy rationalisation and improving rural infrastructure.

But the bottomline is this: Despite the visible signs of revival, there is skepticism about the growth scenario and it isn’t baseless. There are enough reasons to question the ‘economic success’ Modi is already claiming to have achieved in the 20 months of his rule. True, things have improved, but certainly not to the extent that chest-thumping can begin.

(Data from Kishor Kadam)

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Updated Date: Mar 29, 2016 16:10:42 IST