S. Sethuraman
India is likely to see a modest growth revival, with a hopeful end to political uncertainty after the election, which should provide an “impetus” to investment, and on the next government vigorously pursuing fiscal consolidation and implementing tax reforms swiftly.
This assessment is made in the biannual OECD Economic Outlook (May 6), which projects growth at 5.4 per cent in current fiscal and 5.7 per cent in fiscal 2015 (corresponding to 4.9 and 5.9 per cent respectively for two calendar years). It also regards RBI monetary policy appropriate with the core inflation remaining “sticky” and CPI hovering around 8 per cent, above the levels in other emerging economies.
The economy had slowed to 4.5 per cent in 2013-14. But growth is now expected to gather momentum and investment should recover as projects cleared by the Cabinet Committee on Investment are implemented and “political uncertainty declines” after the general elections,” OECD said.
Rupee depreciation and firming external demand in advanced economies would underpin export growth while rise in rural incomes and some deceleration in inflation could boost consumption. Risks to growth in India over next two years are more internal as fiscal consolidation, supply bottlenecks and the still high non-performing loans and corporate leverage would “weigh on recovery”.
Other concerns cited in the Outlook include capital flows becoming volatile in financial market developments, and the un-hedged external debt of some domestic companies. At the global level, OECD reports firmer growth in advanced economies, rebound in investment and trade, and some improvement in the labour market situation.
What may retard steady global growth, by no means as buoyant as it should be, is the “slow pace of growth in emerging market economies”. And global recovery can be blown off course in case of “financial tension in emerging markets with bigger spillovers than anticipated”. This has particular relevance to the slowdown in growth in China and the “fragility” of its financial system.
Geo-political risks have also arisen in 2014 from events in Ukraine and the turbulence depressing the Russian economy, which is losing the moderate recovery it had in 2013. A greater risk for India, as well as other economies, would be continuing uncertainty over China’s slowdown and possible spillovers if “prudential measures” are not used to slow credit expansion. Harder budget constraints on local governments have also been urged by OECD so as to help in rebalancing the economy away from investment and toward domestic consumption.
On India, the Outlook notes efforts during 2013-14 to moderate fiscal deficit and bring down current account imbalance, the latter reducing external vulnerabilities. This should make the base for greater efforts at fiscal consolidation with subsidy cuts and taking up tax and other reforms for rapid implementation.
OECD points out pressures on spending remain with food and fuel subsidies while public expenditure on education and health remains low. Reforms to simplify direct and indirect taxes that could make them more growth-friendly should be implemented “swiftly”. Growth recovery would be gradual depending on investment with the approved projects taking off.
Better fiscal consolidation is urged, changing spending mix away from energy subsidies toward better targeted social and infrastructure investment. That would improve business climate and firm up private consumption. Likewise, more spending on education and training systems should help to promote growth and create better quality jobs.
On the Monetary policy, OECD has noted India’s improved monetary frameworks, and welcomed the proposed move towards inflation-targeting regime to anchor expectations. The policy was tightened at 8 per cent (repo rate) in January and kept constant while inflationary pressures receded. The policy could be eased as inflation declines. But, it said, strengthening monetary policy transmission would require less administrative wage and price setting and measures to increase the health of the financial sector.
Across-the-board spending cuts and higher dividends from public undertakings contributed to achieving the Central Government’s fiscal consolidation target (4.6 per cent of GDP). The current account deficit has been narrowed with subdued domestic demand and restrictions on gold imports while exports were on a rebound. Capital flows are growing and foreign exchange reserves have been replenished. However, it is noted, despite the de-regulation measures, FDI has stagnated at slightly above one per cent of GDP.
OECD estimates combined government deficit (fiscal) at 6.9 and 6.5 per cent in fiscal years 2014 and 2015 while CAD would decline to -1.1 and -.2.0 per cent of GDP respectively. CPI is likely to remain at 7.6 and 7.2 per cent in the two years. Overall, India’s growth rates are likely to remain below rates observed in the previous decade as a result of slow progress on structural reform and weak investment over past two years.
For growth to become faster and more extensive, OECD calls for implementation of the structural reform agenda rapidly. The agenda of reforms it suggests include changes in the “stringent” labour market regulations, to help create jobs, accelerating tax reforms to raise more revenue and in a less distortive way. The additional revenues and savings generated by reducing energy subsidies could finance increases in public education and health programmes.
On the negative side, it points out, failure to halt the rise in non-performing loans could derail pick-up in investment. Overall OECD assessment puts the slowdown in emerging economies as a major factor in global growth remaining subdued this year and probably next year also despite firmer signs of growth in advanced economies. China’s growth is projected to slow down from 7.7 per cent in 2013 to 7.4 per cent in 2014 and 7.3 per cent in 2015.
Given the marked progress in US economy and the projected growth of 2.7 and 3.6 per cent, decline in unemployment to 6 per cent in 2015, and other projections, it is likely that the Federal Reserve can start withdrawing its accommodative policy, though gradually, by the second half of 2015 setting the stage for higher global interest rates.
(IPA Service)
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