Blog Post

So far so good, but investment upturn needed

Rajiv Kumar 16 May 2017

The three years of the Modi government have been hyper active both in terms of reforms actually implemented and even more for the huge body of work in progress.

The slew of measures taken by the Modi government during the last three years have surely laid the foundation for the Indian economy’s transition to a sustained higher growth trajectory with higher levels of inclusion and equity. Admittedly, this work is still in progress. But the hope certainly exists that these will soon produce real tangible results that will help to propel growth in the coming years and more importantly generate sufficient number of jobs that are desperately needed for absorbing the army of impatient young entrants to the workforce.

A lot of effort has been spent trying to reverse the inherited legacy of poor governance, rampant corruption and a marked slowdown in infrastructure capacity development. Moreover, the Modi government has had to face some strong headwinds both globally and domestically with domestic investment coming to a near standstill. Globally too, while the Indian economy has benefited from a sharp decline in world oil prices, international trade has shown its weakest growth over the last few decades and protectionist pressures have raised their ugly head not only in the US but also in some European countries. As a result India’s exports suffered a persistent decline over more than two years before recently recovering their positive growth performance in November 2016.

The economy has, however, shown rather remarkable resilience in coping not only with the sharp decline in global demand but also taking domestic shocks like demonetisation in its stride. The result is that average economic growth has been around 7 per cent that is within the same range as that experienced over the five years of UPA II. All macroeconomic parameters like fiscal deficit, current account deficit; consumer inflation; size of foreign exchange reserves; and exchange rate look to be in reasonable robust health. This is in sharp contrast to July-August 2013, when India was included among the ‘five fragile’ emerging economies that were on the cusp of a major crisis. Today the India story is buoyant in foreign markets and has consequently attracted a record level of nearly $65 billion of FDI in 2016-17. This positive trend continues.

The reasons for foreign investors taking a very positive view of India’s economic prospects are many. These include: i) The large number of reforms undertaken by the Modi government in the last three years. These include: the passage of the GST bill; enactment of the Bankruptcy Code and codification of its rules; measure for improving the business climate; the Benami properties act to mention a few. Modi government has been hyper-active in legislation activity as can be seen by comparing the number of bills during these three years compared to the past. ii) Modi came to office with a promise of eliminating the governance deficit including scams and has effectively delivered on it during the last three years. Scams and high-level corruption are gone. E-governance has made deep inroads in improving attendance and performance in government departments including active monitoring of government schemes, proposals and initiatives. iii) The effective use of the JAM (Jan Dhan, Aadhar and Mobile phones) trinity to minimise leakages from government income transfers and subsidies have significantly improved expenditure efficiency. iv) Giving RBI the statutory mandate for targeting inflation and establishing an independent monetary policy committee has ensured investors of a moderate inflation regime in the years ahead. v) Sticking to fiscal targets and creating a new framework for fiscal prudence in future has shown government’s commitment to stick to fiscal prudence and eschew fiscal profligacy. vi) Launching the Uday scheme for eliminating the huge debt burden from the state electricity utilities and encouraging state governments to not only take on these debts on their books but also take active steps to make Discoms profitable. vii) More than 35 schemes like Digital India, Skill India, Make in India, Free Gas connection to poor families etc, each of which is targeted to address a critical constraint on economic growth or improve the living standard of the poor.

The critical factor, going forward, must surely be the long and urgently needed upturn in domestic investment. This is virtually at a stand still. Commercial bank credit to industry (non-food credit) has come down 50 per cent in 2017 compared to last year with growth in credit flows becoming a mere trickle of 5 per cent in recent months.

Rajiv Kumar, Founder Director, Pahle India Foundation.