Issue :   
January 2018 Edition of Power Politics is updated.         January 2018 Edition of Power Politics is updated.
Issue:Jan' 2018


Space for prudent policy contracting


What is the present state of the Indian economy? Well, the nature of response to this question depends upon who is being asked.
In October, finance minister Arun jaitley held a special press conference primarily to rebut the BJP's ex-ministers, Yashwant Sinha and Arun Shourie, who had gone public with charges of mishandling of the economy. He debunked critics by stating that the fundamentals of the Indian economy were very sound, an expression one had heard often from his predecessor Chidambaram.

Yashwant Sinha This over used funda hides more than what it reveals. Anyway, according to Jaitley, 'sound fundamentals' had helped the economy to achieve an average of 7.5 per cent growth rate during the NDA's 3 year rule. Quoting the IMF, the finance minister had said that India was one of the fastest growing economies globally and set to achieve 8.2 per cent growth next year.
To make this more impressive, he also compared the growth during the NDA with that achieved during the UPA. However, he failed to mention the declining crude oil prices that had helped the government finances, as well as his unwillingness to pass on the low oil price benefit to the consumer. In fact, Jaitley has imposed over 100 per cent levy on POL that has gone to cushion his budget. No finance minister acknowledges the contribution of external factors like low crude prices or international liquidity to their management of the economy.

Arun Jaitley Relying on 'economic fundamentals', the government is aiming to boost growth with massive public spending on infrastructure-roads, housing, power, railways and digital infrastructure. Its other plank is to bail out banks burdened with huge bad debts through infusion of tax payer money into them. He hoped that such infusion would enable them to lend more for private investment. The presumption here is that the private sector, that is mainly responsible for PSU banks' humongous bad debts, will develop the necessary appetite for fresh borrowing and investment.

Arun Shourie He was also confident of moving on fiscal consolidation, meaning that the budget deficit reduction target (3.2 per cent) will be met. It was claimed that the average inflation was coming down - to 2 per cent (July 2016-July 17),and Importexport gap was narrowing. Jaitley further asserted that the adverse impact both of demonetisation and GST implementation was temporary and it was tapering off.
When it came to public investment, some mind-boggling numbers were mentioned. It was said that both government and PSE capex spending this year would be about Rs 7 lakh crore, out of which a major share had already been spent; in a big push for road construction, it proposes to invest over Rs 7 lakh crore for building 83 000 kms road to be completed by 2022, with the promise of generating 14 crore man days of employment.

P Chidambaram While that was the official narrative, the November economic statistics showed a spike in consumer inflation and IIP or industrial growth dropped to a three-month low of 2.24 per cent. Even the RBI has flagged inflation as a big concern. The IMF and other international bodies, while identifying India as a fastest growing economy, and noting the NDA government's thrust to economic reforms and improving ease of doing business, voice quite a few concerns.
Among them, the benefit Indian economy received from low oil prices during the past three years may not be available for long.
This December international crude price has risen to $65 per barrel. Trade protection replacing free international trade has become the trend, mostly led by Trump's USA in pursuit of his "America First' policy. The tightening of American visa policy has already impacted the Indian IT sector, a major exporter of services.
The critics of government handling of the economy reckon that both demonetisation and 'hasty', hiccupy implementation of GST had disrupted the economic momentum and are responsible for wiping out the livelihood of farmers and people engaged in informal sectors. Former RBI governor, Dr. Y. V. Reddy, recently stated that 'their short term impact' was not so short.

Narendra Modi A bigger concern is 'sluggishness in employment', flagged in the official Economist Survey. It also had said that permanent jobs are being replaced by low wage, temporary work. While campaigning for Lok Sabha polls, Narendra Modi had promised to create one crore jobs. Not only the number of jobs generated in the economy so far is lower than before, but demonetisation had wiped out 1.5 million millions jobs between January-April, according to CMIE report. The benefit of whatever growth occurring is flowing more into the top one per cent of people, exacerbating the already worsening income inequality.
Latest statistics show that top one per cent of population controls 53 per cent of national wealth. A major concern voiced is that private sector investment prospects are very low, as this sector is bogged down by heavy debt. The government's attempt to make up for lack of private investment is laudable, the funds will have to come from more public debt and other creative financial instruments like projects linked bonds. There is both concern and scepticism about this prospect.
The credit rating agency S&P signalling its less than enthusiastic assessment of India's capacity for sustaining more debt, has not changed the country's sovereign (credit) rating from BBB-;on the other hand, another less reliable Moody's has upgraded India's rating.

Dr. Y. V. Reddy Another agency Fitch noting that the growth (quarter to quarter) was weaker than expected, has cut the growth rate expectation for current year to 6.7 per cent from earlier 6.9 per cent. For next year also Fitch forecasts 7.3 per cent as against the previous 7.4 per cent.The divergence in assessments clearly shows that India is headed for uncertain gains.
Looking ahead into the new year, one can only expect to witness more acrimonious debate on the economic prospects. it is a pre-general election year, punctuated with eight state assembly elections, including in the BJP ruled MP. Chattisgarh and Rajasthan. Both the Union and relevant state governments could be expected to opt for populist spending and fancy sops to impress voters.
Even before its February 2018 budget, the Centre has committed to fiscal expansionary stance. Trade bodies are expecting rationalization (concessions) of GST. That means spend more than your means, carving a big hole in the future budgets. Significantly, the government has announced that it would soon unveil an employment policy. One does not know whether it is a prelude to introducing some form of UBI- or universal basic income. The Economic Survey had forwarded this idea. All in all the next 12 months will see more contentious politics, reducing the room for prudent economic policies.