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Align Indian economy to emerging global recovery

OCTOBER 05, 2017

By TIOL Edit Team

HAS Indian Economy decoupled with world economy? Is it set to go off the track like bogie derailing from a moving train, which often happens in the country?

This is not crystal-gazing of gloom & doom scenario. This is a rational query based on diverging global and Indian data on economic growth. The data shows that the growth of India's gross domestic product (GDP) is slowing down, whereas the world's average growth is picking up.

According to World Bank's Global Monthly September 2017, "Global growth picked up to 3.6 percent in 17Q2 (q/q saar), the strongest quarterly performance since 2010. The 17Q2 performance reflects an acceleration in advanced economies and continued recovery in major commodity exporting emerging markets and developing economies (EMDEs)".

It adds: "Global goods trade growth, which began to recover in mid-2016 after two years of pronounced weakness, remained robust in recent months. The benefits of the recovery in global trade have been broad based, with export growth trending upwards in advanced economies and remaining firm in EMDEs".

In its Trade & Development Report 2017 released last month, United Nations Conference on Trade and Development (UNCTAD) agrees: "the world economy in 2017 is picking up but not lifting off".

Unfortunately, Modi Government is not feeling and riding on these global winds of positivity. This is evident from a speech recently delivered by Finance minister Arun Jaitley. He stated: "Here we were facing somewhat globally unsupportive environments. And yet, I will say with a sense of satisfaction that we have broadly put the economy on track."

Independent analysts don't share this perception. The Country's GDP growth has registered six consecutive, quarterly declines to 5.7% in the sixth, i.e., April-June quarter of 2017-18.

Sluggish growth in exports and faster growth in imports has become an eyesore for a longer period. The trade deficit for April-August 2017-18 is thus estimated at USD 39872.54 million, a massive increase over USD 12723.43 million recorded during corresponding period of previous year.

Fortunately, no one entity has as yet perhaps projected further decline in GDR growth rate over the next three quarters. All economists have, however, lowered the projected growth in GDP for entire 2017-18. Many experts agree that GDP growth will pick up slowly from here on. We have to keep our fingers crossed for want of clarity on proposed fiscal stimulus and persisting business uncertainty.

Unfortunately, the Government has neither the fiscal headroom for comprehensive stimulus nor the political will to admit that there is a genuine problem. The effective resolution of an issue can be thought of only if there is honest admission and understanding of the problem.

We hope the Government would consider all economic and non-economic factors that have dampened growth prospects and scared away a bulk of private investments.

Modi Government should first realize that NDA's ascendancy to power coincided with emergence of a benign global environment. It was characterized by tumbling prices of commodities including crude oil and fertilizers.

The Government used this opportunity to manage fertilizer subsidy without undertaking any meaningful reforms. It effectively dismantled bulk of the petro-products subsidy. It did mop up a mountain of revenue through dozen unwarranted hikes in excise duty on petrol and diesel. It is also in the midst of monthly hikes in prices of subsidized domestic-use kerosene and LPG in very small doses. These subsidy reforms deserve applaud.

Instead of putting this resulting additional revenue in a petroleum prices stabilization fund for use in period of run-away rise in crude prices, the Government frittered the money in the normal budgetary process. This did not give any discernible momentum to growth perhaps because it coincided with huge expenditure on handsome revision in wages of Government staff as recommended by the Pay Commission.

This fiscal laxity is now spilling over to the States, thereby eating into their resources that would have normally been utilized for capital expenditure. The Centre should help States manage this wages revision challenge to keep the country's overall fiscal deficit on leash without hampering capital investments.

The Centre, however, appears to be looking for patchwork solutions to economic slowdown. This is obvious from its decision to reduce excise duty on petrol and diesel by Rs 2/litre. It is also egging the States to reduce value added tax (VAT) on the two products. Both the Centre and the States mopped windfall revenue through hikes in excise and VAT respectively when global crude prices were soft over the last three years.

Now that crude prices are inching up, the Centre is banking on patchwork management of public resentment over daily hikes in prices of petrol and diesel.

It should instead plug for bringing these and three other petroleum products under goods and service tax (GST) to boost economic efficiency. This fiscal stimulus should not be delayed. Let the Centre and the States prune down their non-productive expenditure for operating within the confines of fiscal discipline.

GST council should thus shift from fire-fighting mode on managing GST problems to substantive reforms. It must transform GST into a good and simple tax from the present drag on the growth.

Simultaneously, it must take initiatives to stabilize policies and honour contracts to restore confidence of the corporate sector in governance. It must avoid unwarranted controversies such as the one over the fate of upcoming General Electric's diesel locomotive project in Bihar.

Within less than two years of award of the letter of intent to the company for supply of 1000 locomotives over 10 years, the Railways is backtracking. It believes it can save money if it substitutes proposed induction of hi-tech diesel locos with electric ones.

This is not an isolated instance of policy and fiscal flip-flops. Modi Government should muster courage to admit that business uncertainty resulting from avoidable policy and regulatory changes is hampering its ‘Make In India' initiative.

Lastly, the Government should overcome all constraints to latch back exports and economic growth back to the upswing in global growth. Robust domestic demand and untapped global demand should be transformed into durable wheels of double digit growth of GDP.