The economy has found its mojo this century, but work is only half done on the reforms front

By Dinesh Unnikrish****nan and Kishor Kadam The Indian economy has grown six-fold in size between 2001 and 2015, and now stands at Rs 125.41 lakh crore in the fiscal year 2015, from Rs 21.77 lakh crore in the fiscal year 2001 at the start of this millennium. Since 2001, economic growth has steadily picked up progressing to its peak in the boom years prior to the onset of the 2008-09 global financial crisis that shook the world in the aftermath of the collapse of Lehman Brothers on 15 September, 2008. The after-effects of the crisis that spilled over to the emerging markets including India, resulted in a sharp slowdown in the domestic market as well. The pace of economic growth slowed in the subsequent years and remained below five percent in fiscal years 2013 and 2014, towards the end of UPA-rule. But the whole picture changed when the NDA government came in with a new set of GDP numbers based on the 2011-12 prices. GDP for fiscal year 2013 suddenly shot up to 5.1 percent from the earlier estimate of 4.5 percent in the old series, and the gap widened even further to 6.9 percent in fiscal year 2014 from the earlier estimate of 4.7 percent. Experts questioned the huge discrepancy between the new set of GDP numbers and the situations on the ground as indicated by various parameters such as muted corporate earnings, low credit off-take and high stress in the banking system. The economy, which clocked a growth of 7.3 percent in fiscal year 2015, is projected to grow by seven to 7.5 percent in fiscal year 2016. Even at this pace, India will be the fastest growing major economy in the world, ahead of China. What led the growth? The key drivers of economy in these 15 years were mainly services and industry. While the contribution of these two segments to GDP has grown steadily, that from agriculture and the allied sector has declined steadily over years (See the chart). This possibly explains the shortage of essential food items to the increasing population. What is worrying is the growth of industry has taken a severe hit in the recent years with the growth slowing to mere 0.4 per cent in fiscal year 2014. Services sector, on the other hand, has been growing steadily by around 7 per cent in the last three years. Improving fiscal deficit The economy, over years, has gained significant fiscal discipline especially. Fiscal deficit shot up to 6 per cent in the immediate years after the 2008 global financial crisis, but has declined after that after the country reined in gold imports and also benefiting from the decline in crude prices. The NDA-government has a fiscal deficit target of 3.9 per cent of GDP in the current fiscal and plans to bring it down further to 3.5 per cent in fiscal year 2017. Inflation concerns Perhaps, more than the growth worries, the biggest challenge policymakers faced in the economy was inflation management. Both the retail and wholesale inflation picked up sharply in the years beginning fiscal year 2007. Since then, the Reserve Bank of India (RBI) has had a tough time addressing the inflation problem. The inflation, which was primarily on the demand-side in the initial phase, subsequently became more structural and widespread. Between fiscal year 2010 and fiscal year 2014, both the retail and wholesale inflation shot up to double digits resulting in deeper concerns. The central bank went on to fight inflation in a more aggressive manner after the former International Monetary Fund Chief Economist, Raghuram Govinda Rajan took over as RBI governor in September, 2013 after a brief stint in the Indian government as the economic advisor. RBI’s cautious approach, the benefit of crashing lower crude oil prices and government’s efforts (to improve food supply and curb hoarding), finally brought down the inflation numbers to central bank’s comfort zone. But, prices of food items and vegetables defied the overall downward inflation trend. Of this, prices of pulse items have shot up to record high levels severely hurting Indian households. There isn’t a solution for this problem yet. India’s foreign trade The last 15 years of the Indian economy have seen India’s merchandise exports growing seven-fold from $44.1 billion in fiscal year 2001 to $310.5 Billion in fiscal year 2015. But, worryingly, in the backdrop of a slowing world economy, exports began shrinking post 2014. The exports have fallen for 12 consecutive months impacting local exporters. In fiscal year 2016, India’s merchandise is estimated to decline to $174.3 billion. Forex reserves India’s foreign exchange kitty has grown eight times. Stronger forex reserves have prepared India to face possible capital flow headwinds and, thus, support the economy in volatile times. Bank credit and deposits Bank credit and deposits have grown strongly in the 15-years except in the last few years but the credit growth to industry has slowed substantially in the recent years. This is mostly on account of high stress on banks’ balance sheets, capital constraints and poor demand on account of lackluster economic activity. Food-grain production Increasing demand for food supply has increasingly become a key challenge for Asia’s third largest economy . The country’s food-grain production hasn’t grown in the desired pace to cater to the growing population, mainly on account of land availability and irrigation problems. Indian irrigation is still largely dependent on monsoons for irrigation. Monsoon failure significantly impacts cultivation in producing states, leading to supply-side problems. Even while the overall inflation has created concern, experts highlight that the reason for the spike in pulse prices and other essential items is the stagnant growth in cultivation. External debt India’s external debt has grown close to five times in 15 years. Per capital income India’s per capita-income has improved from Rs 21,368 in 2001 in current prices to Rs 92,093 in fiscal year 2014. To sum up, the Indian economy has found its mojo in the first fifteen years of this millennium. The economy has expanded on all fronts and is seen as the only bright spot among the emerging market economies. But, to progress to the next level of growth the country needs significant reforms push. That’s where the real challenge lies for its policymakers. Check out Firstpost's collection on how the past 15 years transformed sports, entertainment, technology and more in F.Rewind.