Overview: Modi government setting the stage for India's economic comeback
The economy inherited by the NDA government under Prime Minister Narendra Modi's leadership has seen a major improvement in the past nine months on several fronts, however, certain hiccups are still there which will take time to sort out. Some concerns have also been expressed that the NDA regime is not fully capitalising on its mandate for change.
Since May 2014, the government has taken several strong measures to revive both growth cycle and investor sentiment. In the initial round of its major policy initiatives, the Modi government has allowed the FDI in railways and defence sectors, followed by labour reforms, complete deregulation of diesel prices and easing of FDI rules in construction.
Further the government has adopted executive route (ordinances) for coal sector reforms, to amend the land acquisition laws, to increase the FDI cap in insurance sector from 26 to 49 percent and for auction of mines of iron and other minerals, It would still be an uphill task for the NDA government to finally convert these ordinances into Acts through the legislative procedure but it has certainly demonstrated the firm commitment and determination of the BJP dispensation towards reforms.
Moving ahead on its reforms agenda, the government has also inched closer to its aim of rolling out the Goods and Service tax (GST) from April 2016.
Several other initiatives of the government, including efforts to revive stalled projects, re-schedulement of premium payouts for road ventures and relaxation of environmental clearances have also alleviated some sector-specific concerns.
Despite these initiatives and actions, India's growth story is still dismal and a huge bounce back is not expected immediately.
During the current financial year, the country's economy is expected to recover and clock a growth rate of 5.5 percent. In the first half of the current fiscal, India’s economic growth improved to 5.5 percent as against 4.5-4.7 percent over the past couple of years.
For the last few years, manufacturing has remained the major grey area. However, November industrial data has shown some sort of improvement in it and likely to be more substantive in the coming months. Moreover, the recent announcement of rate cut by the Reserve Bank of India will also support industry in recovering.
Earlier this month, the RBI decided to cut the benchmark interest rate by 0.25 percent to 7.75 percent with a view to boost growth. The decision to reduce repo rate came nearly a fortnight ahead of the scheduled date of monetary policy announcement on February 3.
Adding to that, declining savings rate is also a major concern. The government should promote salaried class for more savings by announcing tax exemption limit and incentives.
On the global front, steep fall in oil prices and gradual recovery in the US economy are the two major prevailing factors which directly impact our economy.
India is now better placed to deal with the post tapering tantrum. Against the backdrop of sustained recovery in the US economy, the Federal Reserve had in last October decided to taper its stimulus programme completely. It must be remembered that India was one of the countries that suffered the most when QE tapering was first mooted in mid -2013.
Contrary to the US, economic recovery in Europe is still not substantive and homogeneous and, to fuel it, the European Central Bank has recently announced massive stimulus programme. Experts are opining that India will be the major beneficiary of this quantitative easing and could see more fund inflow.
On the other hand, falling oil prices have certainly eased the task of government on fiscal front as India imports more than two-third of its requirement, which constitutes around 30 percent of total imports.
It is estimated that a fall of USD 10 in crude prices could reduce the current account deficit by roughly 0.5 percent of GDP and the fiscal deficit by around 0.1 percent of GDP.
Moreover, lower crude price will surely facilitate room to the Reserve Bank of India in adopting growth-centric approach while reviewing monetary policy.
Not just in the short term but also over the medium to long term, lower oil price will continue helping the government’s macro-economic management (both budget and fiscal) by improving macro fundamentals (inflation, fiscal deficit and current account deficit) as shifting power dynamics, has lessened the chance of immediate bounce back in oil prices.
To get the economy fully back on track, the Modi government will have to keep up the pace of efforts for the improvement of investor sentiment, climate for doing business by removing bottlenecks, employment generation and containing inflation.
Here is an overview of the Indian economy: -
Poor showing by agriculture and manufacturing sector pulled down the country's economic growth rate to 5.3 percent in the second quarter ended September 30 compared to 5.7 percent rate in the first quarter ended June.
The GDP growth in the first half of the financial year, April-September, stood at 5.5 percent as against 4.9 percent in the corresponding period last year. The economic growth is projected to be in the range of 5.4-5.9 percent in the current financial year.
Growth had remained below 5 percent in the previous two financial years.
Reviving hopes of economic recovery, industrial production grew at a 5-month high of 3.8 percent in November due to improvement in manufacturing and mining sectors as well as better offtake of capital goods.
The factory output, as measured by the Index of Industrial Production, had declined by 1.3 percent in the same month of 2013.
For the April-November period of the 2014-15 fiscal, IIP was up 2.2 percent, as against 0.1 percent in same period of last fiscal.
Reflecting tight financial position of the central government, fiscal deficit stood at Rs 5.25 lakh crore as of November-end almost touched 99 percent of the full year target of Rs 5.31 lakh crore.
The fiscal deficit during April-November period was 98.9 percent of the 2014-15 estimate, mainly because of subdued revenue realisation.
The government is committed to restricting the fiscal deficit at 4.1 percent of the GDP during the current financial year, the lowest in seven years, and has taken several steps towards it.
The fiscal deficit -- the gap between government expenditure and revenue -- during the same period last year was 93.9 percent of that year's target.
After recording a current account deficit every quarter for over seven years, the current account balance is likely to swing into a surplus of 1.5 percent of GDP in Q1 of 2015, a research report said.
The current account deficit widened to USD 10.1 billion or 2.1 percent of GDP for the September quarter as against 1.2 percent in the year-ago period due to higher trade deficit. It stood at 1.7 percent for the preceding June quarter.
For the first six months of 2014-15, the current account gap narrowed to 1.9 percent or USD 17.9 billion from 3.1 percent in the same period a year-ago.
CAD was 1.2 percent in the second quarter of the previous fiscal on unconventional moves to arrest the rupee slide.
India's trade deficit declined to 10-month low of USD 9.43 billion in December mainly on account of falling imports due to slump in crude prices, though exports too have come down.
The trade deficit in December was down 44 percent compared to November. In December 2013, it was USD 10.2 billion. The previous low in trade balance was USD 8.13 billion in February, 2014.
The trade deficit during April-December was USD 110 billion compared to USD 107 billion in the same period last fiscal.
Imports bill declined by 4.8 percent to USD 34.8 billion during the month from USD 36.6 billion from December 2013, leading to improvement in the trade balance situation.
The imports during April-December was USD 351.2 billion as against USD 338.9 billion, registering a growth of 3.63 percent. Exports too fell by 3.8 percent to USD 25.4 billion. Outbound shipments were valued at USD 26.4 billion in the same month last year.
Exports in April-December totalled to USD 241.15 billion as against USD 231.8 billion in the comparable period last fiscal, a growth of 4.02 percent.
In the current fiscal, the government has budgeted to collect over Rs 13.6 lakh crore as tax revenue, which requires a 16 percent growth in direct taxes and 20 per cent growth in indirect taxes to meet the target.
Direct tax collections
The direct tax collection during the first nine months of the current financial year increased by 12.93 percent to Rs 5.46 lakh-crore over the corresponding period a year ago.
The growth rate of direct tax collections, however, is still short of annual target of 16 percent. During the April- December period of last financial year, the government had collected Rs 4.84 lakh-crore.
According to the Budget 2014-15, the revenue mop up from direct tax is targeted at Rs 7.36 lakh crore for the current fiancial year.
Indirect tax collections
Government has collected Rs 3.77 lakh crore, or 60.6 percent, of budget target for indirect tax by December 2014.This was higher by 6.7 percent over the corresponding period in the previous year.
The indirect tax revenue collection was Rs 3.54 lakh crore in April-December 2013.
Total indirect tax collection in December was Rs 49,651 crore, up 5.1 percent from Rs 47,235 crore collected in similar month of the last fiscal.
Inflows of foreign direct investment into India rose by about 25 percent to USD 17.35 billion in the April-October period of the current fiscal.
Improvement in the macroeconomic situation and investor sentiment on account of a series of steps taken by the new government helped attract higher FDI. In April-October 2013, the country had received USD 13.82 billion foreign inflows.
Overseas investors pumped in a record Rs 1.6 lakh crore (USD 26 billion) into the Indian debt market in 2014 mainly on account of high interest rate and government's reform agenda.
The latest round of inflow came after they pulled out around Rs 51,000 crore (USD 8 billion) in 2013.
In 2014, FIIs have infused a net amount of Rs 1,59,157 crore in the debt markets -- making it the highest investment level since 1997. Besides, FIIs have poured a net of Rs 98,000 crore in equities.
The retail inflation measured on consumer price index (CPI) for December inched up to 5 percent while it was 4.38 percent in November -- the lowest level since government started computing the new series of data in January 2012.
Wholesale price index (WPI) based inflation too moved up marginally in December to 0.11 percent from zero level in November, reversing the six month declining trend. The WPI inflation was on the decline since June 2014.
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