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Handling the High Growth

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August 14, 2018

What is the issue?

  • India may well record the highest growth rate globally.
  • However, much more is needed to create jobs and reduce poverty.

How is the growth trend?

  • Agricultural growth may at best be equal to what it was last year - 3.4%.
  • The services sector may perform better because public expenditure will be maintained at a high level.
  • The Index of Industrial Production (IIP) for the first quarter show substantial improvement.
  • After several quarters of low growth, there was a strong pick-up in GDP in the last quarter of 2017-18.
  • If this momentum is maintained, the growth rate (2018-19) will certainly be above 7%.
  • International financial institutions have forecast a growth rate of 7.3%.
  • The Reserve Bank of India (RBI) expects it to be 7.4%.
  • Given these, it is essential to pay attention to the concerns that can come in the way of faster growth.

What are the factors to be addressed?

  • External environment - The external environment is far from reassuring favourable growth.
  • Trade wars have already started and can get worse.
  • Recent tariffs decisions by US, China and many others, including India, confirm this.
  • Besides these, there are country-specific sanctions such as those against Iran.
  • These have a direct impact on crude oil output and prices.
  • Deficit - India benefited from the fall in crude prices earlier but this position has reversed.  
  • As a net importer, India’s balance of payments can get affected if crude prices rise again.
  • India’s current account deficit (CAD) was as low as 0.6% of GDP in 2016-17.
  • It rose to 1.9% of GDP in 2017-18, mainly because of crude price rise.
  • India’s trade deficit has always remained high.
  • In 2016-17, the merchandise trade deficit was 4.8% and rose to 6% of GDP the next year.
  • Banking system - RBI released its latest financial stability report highlighting a high level of NPAs.
  • The gross non-performing asset (NPA) ratio of scheduled commercial banks rose to 11.6% (March 2018).
  • The ratio for public sector banks was 15.6%.
  • The high NPA level has a negative impact on the provision of new credit.
  • In fact, credit to the industrial sector has slowed down considerably.
  • Fiscal position - So far in the current year, the Centre's fiscal position has been within limits.
  • The fiscal deficit position has shown improvement over the last year's corresponding period.
  • There are two aspects of the fiscal position to be paid attention to.
  • One relates to GST, as GST revenues are currently running behind budgetary projections.
  • It is also not clear how much of the refunds are outstanding.
  • Revenues may pick up in the second half but any shortfall can put fiscal position under stress.
  • The second concern relates to the impact of the proposed MSPs for some agricultural commodities.
  • The concerns with MSP hike in the absence of a healthy procurement system remains.
  • Payments could be a serious burden to government's fiscal position if market prices fall steeply.
  • This apart, there are administrative problems involved in implementing the scheme.

What lies ahead?

  • Deficit - The solution is raising the export growth which has fluctuated in recent years.
  • In this context, ensuring that the rupee does not appreciate in real terms is crucial.
  • Exports have to be made competitive and exchange rate is just one element in this.
  • Improved efficiency in production and better infrastructure are equally important.
  • Banks - Recapitalisation of banks has become an urgent necessity.
  • This will, of course, impose a serious burden on the fiscal position.
  • But unless banks recover fast, sustaining growth of the industrial sector is difficult.
  • Fiscal position - Government has to assess the multifarious effects of decisions such as the MSP hike.
  • The expected growth rate of 7.3-7.4% may be reassuring but it falls short of our potential.
  • It is much below of what is needed to raise job opportunities and reduce poverty.
  • Hence a stronger push towards a much higher growth is very much the need of the hour.

 

Source: The Hindu

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