India’s ruling NDA regime will, no doubt, bask in the glow of regaining the world’s fastest-growing economy position according to the International Monetary Fund (IMF). Its economy has recovered from disruption due to demonetisation – when 86 per cent of currency was taken out from circulation to check unaccounted wealth in November 2016 and the introduction of a nationwide Goods and Services Tax that scrapped state levies to turn the nation into a single market on July 1, 2017.
Ahead of the national elections in early 2019, this can be the crucial evidence that it has honoured its promise to bring the good days back again.
India’s growth is projected at 7.3 per cent in 2018-19 and 7.5 per cent in 2019-20, up from 6.7 per cent in 2017-18. The Fund’s projections are, of course, subject to change as the earlier forecast for India in April was higher at 7.4 per cent and 7.8 per cent for 2018-19 and 2019-20.
Growth was lowered because external and domestic risks are “tilted to the downside,” like higher oil prices and the negative effects it has on the economy. Domestically, there was also a faster-than-anticipated hiking of interest rates by the central bank to head off growing inflationary pressures.
But even if growth is a tad lower at 7.3 per cent, it still is ahead of China. There are also hardly any other large economies with a comparable pace of expansion. While that is the good news, the bad is that India’s growth story could be downgraded if downside risks worsen.
Besides higher oil prices, the external ones include a retreat from globalization, growing prospects of a full-blown global trade war and worsening geopolitical tensions.
The domestic risks include revenue shortfalls from GST, delays in addressing the stressed balance sheets of banks and corporates, among others. .
In such a turbulent milieu, the big question is how did the IMF arrive at such an upbeat assessment of India’s growth? At a time when investments in plant and equipment, especially by India Inc, are believed to be still depressed, the Fund believes that a recovery is in the making.
Investments as a share of the nation’s output of goods and services or GDP thus are projected higher at 32.2 per cent in 2018-19 and 2019-20 from 30.6 per cent in 2017-18. At a time when India’s export growth is languishing, the Fund is bullish on double-digit growth prospects this financial year and the next.
The ruling political dispensation should, however, realise that achieving the world’s fastest-growing economy tag is one thing, sustaining it is another. This calls for deep-going structural reforms – a task that is complicated by the government being in an election mode.
The IMF presciently notes that policies have shifted to implementing existing reforms like the insolvency and bankruptcy code and GST than initiating new ones. Budget pressures could increase with revenue shortfalls from GST and loosened purse strings for welfarist spending and giveaways to boost its electoral prospects.
“We really hope that this election would not derail the Modi government’s efforts to reform. And once the elephant starts running, it would have a positive impact on the global economy,” noted Ranil Salgado, IMF’s mission chief for India.
Structural reform includes those of factor markets: labour, land and capital. Despite an extension of fixed-term labour contracts, labour laws remain “numerous, outdated and restrictive”, according to the Fund. Greater labour market flexibility will encourage job creation in manufacturing and enable India to reap the demographic dividend of a young workforce.
Land acquisition laws are also in a limbo. The clean-up of bank and corporate balance sheets must accelerate so that bank credit revives to stimulate growth. To be sure, the policy focus of the NDA government is to resolve bad loans.
But there is no political appetite for a more durable solution for the banking industry’s woes to reform the governance structures of public sector banks with lesser state control.
Reforms to free up agricultural product markets to make cultivation more viable are also not on the table. The growth recovery narrative thus is predicated on structural reform that can enable India to drive global growth for three decades as China did not long ago.
(The writer is a New Delhi-based economics and business commentator. He can be contacted at firstname.lastname@example.org)