In the course of his campaign for the 2014 Lok Sabha polls, Narendra Modi had taken on the Congress-led UPA government over policy paralysis and economic slowdown and had promised to lead India on the path of growth and development if his party was voted to power.
What he had said was true. Some four years ago, Indian economy's annual rate of growth was near 9 percent. And not many will forget that the Sensex had scaled a new high on Diwali Day in 2010, closing above the 21,000 mark for the first time ever. But, since then it has been a downhill all the way. Inflation rates sky-rocketed, interest rates went up and growth came down to about 4.5 percent within two years. GDP was 4.7 percent in 2013/14. Not to forget the depreciation of the Rupee and the widening of the current account deficit. Some of the sectors that were deeply affected were real estate, infrastructure and capital goods among others.
And though, the then Finance Minister P Chidambaram, did blame the unfavourable global conditions partly for the downslide and though India had one of the worst monsoons in 2014, his government led by an economist PM, Manmohan Singh, does need to take their share of the blame for the mess. What also did not help matters was the fact that the previous regime was hit by a series of scams from 2G to coal blocks allocation.
Thus, for Union Finance Minister Arun Jaitley, the challenges on the economic front are humongous. He has often said that he inherited the 'economy in shambles' from the UPA government. Given some of the above parameters, one can grant him that benefit of doubt. But the past is done with and now is the time to look ahead. The people are getting restless and needless to say one of the parameters of development for the common man is lowering of prices and jobs. They do not understand the nitty-gritty of hard-core economics and neither are they interested.
In a pre-Budget meeting with economists recently, Jaitley said that the BJP-led NDA government was committed to fiscal discipline, boosting investment in infrastructure and reviving of manufacturing sector. He also reassured the industry and the country that they had managed to bring current account deficit within 'comfort level' with help from falling oil prices, indicating that the economic revival had begun.
It has to begin for the sake of the country and the credibility of the Modi government. It will not be an underestimation to say that 2015 will be a make or break year for the NDA government and in turn the Finance Minister. So, to start with, if PM Modi's 'Make in India' initiative has to kick-off and in turn generate jobs, the Finance Minister will have to regain the confidence of investors. Modi has often said to foreign investors that India offered them 3Ds - democracy, demography and demand – which will not be found anywhere else in the world. The above proposition sounds attractive but it will not be an easy task to woo investors.
Consider this - A report by the World Bank, in October last year, (even though it covered the period from June 2013 to May 2014 when the UPA was in power), said that India had slipped to 142nd place out of 189 countries for ease of doing business. It stood at 184th place in the category "Dealing with Construction Permits", and 186th in "Enforcing Contracts".
Then, Jaitley will have to address the aspirations of around 65 percent of India's population which is below 35 years of age. According to International Labour Organisation's report published in 2014, unemployment rate in India has been showing an increasing trend since 2011 when it was 3.5%. The same rose to 3.6% in 2012 and climbed to 3.7% in 2013. The same report said that India had been experiencing 'jobless growth' because total employment grew by only 1.1 million from 2004/05 to 2009/10 (based on the National Sample Survey), representing an employment elasticity of almost zero.
As per another data, about 12 to 15 million new people enter the workforce every year in the country. Needless to say, these statistics will needs to be tackled by a strong economic revival package and right implementation of policies.
Yes, the economy registered a higher growth in the first half of the current financial year at 5.5 percent as compared to last year's 4.9 per cent in the first half, and 4.7 per cent in 2013-14, but that is clearly not enough. And yes, the government did undertake the long-awaited structural reform oriented measure by introducing a bill to amend the constitution to implement the Goods and Services Tax (GST).
And, in keeping its promise to uplift the economy, the government also raised the FDI limits in defence and Railways. At the same time, stepping ahead with the reform agenda, the Cabinet recently brought Ordinances on the land and coal reforms along with hike in FDI limit in insurance sector. But it needs to do more.
However, the good news is that India has been grabbing global attention once again with PM Modi hard-selling the 'India story' from US to Australia to Japan. The other good news is that inflation is going down, allowing the RBI, in a surprise move, to cut repo rate from 8% to 7.75% on January 16 (a key rate that banks benchmark their lending and deposits against), paving the way for a little lower EMIs on housing, auto and personal loans.
RBI Governor Raghuram Rajan did acknowledge as much when he said that inflation had fallen slightly below the 8 percent targeted by January 2015 and it was unlikely to be below 6 percent by January 2016. And though a section of the industry said that the cut was too small to push a major economic recovery, a large section welcomed the move saying that it would lift sentiments by signalling that the RBI was ready to lower rates to spur growth.
Plus, India's factory output has grown at a five month high of 3.8 percent in November 2014 from a 4.2 percent contraction in October, which signals an industrial turnaround. At the same time, what should also boost morale is the fact that according to the World Bank, India is set to become the fastest-growing big economy in the world in the fourth year of Modi's government, edging past China. Its publication, Global Economic Prospects, said recently that the country would register 7% rise in GDP in 2017 compared with 6.9% for China.
Chief Economic Advisor Arvind Subramanian is also hopeful that the economy is poised for 6 – 6.5 percent expansion in the next financial year. Meanwhile, all eyes will be on the Budget that Jaitley is due to present in February, which will be the first full one of the present government and wherein a slew of big-bang reform announcements and tax-relief for the common man is expected.
He will also have to deal with, among other things, retrospective tax, brought during UPA rule, which he has maintained has only brought 'bad name' to India rather than garner any additional revenue. “We inherited an economic situation of negative sentiment, where no one was willing to invest. There was reduced economic activity. The negative sentiment was further accelerated by ultra-aggressive tax policy,” he was quoted as saying in Parliament.
Moreover, in the recent Vibrant Gujarat Summit the Finance Minister promised a stable tax regime, easy land acquisition and implementation of GST within a year, among other things. Thus, 2015 is the year when he and his men will have to keep the promises made to bring India's economy back on track and present a growth-oriented Budget.
Can India become a $20 trillion economy from a $2 trillion one that it is today, as envisaged by PM Modi? Also, can Minister Jaitley make 2015 'India's year'? For the sake of the multitude of India's population that live in abject poverty and millions who do not have jobs and thousands who struggle to make ends meet, one hopes so.
(This article is third in the 'Looking ahead to 2015' series.)