Repairing economy: Chill Jaitley, these graphs show Chidu's 'magic' has started working

Narendra Modi led the BJP to a thumping victory in the general election on the promise of turning the economy around and to do so is trusting the financial and legal acumen of his new Finance Minister Arun Jaitley. Jaitley has in the past confessed that the previous government’s handling of the economy could give anyone sleepless nights and that he will be aiming to better his predecessor’s record.

“We have to restore back the pace of growth, contain inflation and obviously concentrate on fiscal consolidation itself,” Jaitley told reporters after taking charge.

He may have it a little easier than he’d admit. That is because the steps taken by P Chidambaram and RBI Governor Raghuram Rajan towards the fag end of the UPA-2 tenure have started paying off.

In fact, a research report by Deutsche Bank says Indian economy is at the cusp of a change now. According to the report, the economy was in a vicious downcycle between 2010 and 2012 and since August 2012 the Indian economy has stabilised. Yes, August 2012 was whenChidambaram returned to the finance ministry.

“A partial decontrol of fuel prices, slashed government spending, curbing gold imports and a thrust on project clearances helped stabilize the economy. The current account deficit has come down sharply, currency has stabilized and economic growth appears to have bottomed,” it notes.

It is true. For proof, see these graphics:

A slow rise in investment projects:

A falling fiscal deficit as a percentage of GDP:

And a growth in components of India’s GDP - economic activity wise:

Though the slow down in the manufacturing sector continues to be a weak spot, Jaitley is actually getting an economy where growth can take off provided right decisions are made.

That is why the brokerage says, “For the stabilization phase to translate into a virtuous cycle, the new government needs to urgently re-direct government spending from consumption to investments, accelerate clearances for stalled projects, revive private sector confidence and cut wasteful subsidies.”

Unlike his predecessor, Jaitley faces relatively fewer political compulsions and should find it easier to begin the process of structural reforms, which include a few hugely unpopular decisions like cutting fuel subsidies.

But with a few state assembly elections looming ahead, it remains to be seen how far can the government go on cutting the wasteful expenditure.