In the long run we are all dead. This cannot justify short-term myopia to impair long-run vision. Four years ago, India’s macroeconomic vulnerabilities came to the fore, and the country had the ignominy of being reserved for the most-vulnerable emerging markets at the time.
But four short years later, India is widely considered the safe haven in the emerging market universe. But what has underpinned that transformation has been conscious policy choices made by this government.
The Consumer Price Index (CPI) inflation averaged 9.5% between 2007 and 2013. But in the tenure of this government, CPI inflation has averaged less than half of that. Food inflation is the unsung hero averaging 4.5% in this government’s tenure despite successive droughts in 2014 and 2015. This will broadly remain so despite slightly deficient monsoon.This is no doubt, the outcome of dramatically improved food supply management, from de-bottlenecking supply chains, improving storage and warehousing, chipping away at the Agriculture Produce Marketing Committee’s, being proactive about imports, and not overreacting on minimum support prices.This has been complemented by formally adopting an inflation target, and setting up a Monetary Policy framework (MPC) – to deliver a 21st century monetary framework. Household inflationary expectations have begun to come down, consumer purchasing power has increased, and exchange rate expectations have become anchored.
When the economy had an average growth rate of 8.3% between the years 2003-04 and 2011-12, the average corporate savings rate stood at a meagre 7.4% which significantly increased to 11.8 % of GDP.
Gross capital formation as a proportion of GDP seems to be within the range that is required to achieve a growth rate of 7.5-8%. Currently at 31.9% in both 2014-15 and 2015-16, it is indeed below the 34.6% figure during 2003-04 and 2011-12. This might be worrying. However one should remember too that in the year 2003-04, the economy had achieved a growth rate of 8.1% with a GCF at just 26.1%. There is no mechanical relationship — technology and productivity have a significant role. Arvind Panagariya , former NITI head, highlighted this in a recent article. Natural resources and licences on the other hand are being allocated through transparent auctions specially for coal and spectrum.
Despite two large obligations – the Fourteenth Finance Commission that significantly increased the devolution to states and the 7th Pay Commission – the Centre has consistently brought its fiscal deficit down. Notwithstanding fiscal consolidation, the central public investment has been protected as best as possible.
Orthodox monetary and fiscal management — in conjunction with lower oil prices — has meant that India’s current account deficit has narrowed dramatically from 4.8% of GDP in 2012-13 to 0.7% of GDP in 2016-17. The impact of recent rupee depreciation and inward portfolio flows will benefit exports and mitigate any significant deterioration in the current account.Unsurprisingly, net foreign direct investment (FDI) which used to average $20 bn a year before this government took office has almost doubled to $35 billion a year. Additionally, foreign portfolio flows have surged into India’s debt market reflecting enhanced macroeconomic stability. The opening of corporate bonds to foreigners and the introduction of Masala Bonds has also broadened with global capital markets.
Successful legislative enactment given unquestioned parliamentary majority in the Lower House and floor management skills has enabled the enactment of some far-reaching legislation. These include the bankruptcy law languishing for long following the recommendations of the Financial Sector Legislative Reforms Commission .This law should enable resolution of stressed assets and secure better reallocation of capital as well as boost private investment. The goods and services tax (GST), entailing far-reaching constitutional amendments finally unifies India into a common market.The impact of GST on allocative efficiency and reduction in transaction costs cannot be overstated. These reforms along with Aadhar, Jan Dhan and Mobile JAM will significantly boost total factor productivity. On the GST, the finance minister has repeatedly recognised the need to enlarge its ambit as well as reduce the rates and simplify procedures. However its enactment itself was a path-breaking achievement. Jaitley cannot now become the victim of his own success. Every success no doubt alters the goalpost. We now seek not only a GST but an instant flawless GST!
The Fiscal Council is the first example of genuine federal partnership. This augurs well for the future. The remaining structural reforms on factors of production like land and labour need the active concert with the states. The innovative path of the fiscal council on other such federal-related issues could be a new path ahead.
Game changing structural reforms disrupts status quo, upsets vested interests but enables a fresh start after overcoming transitional problems. The reforms of the early 1990s showed up in higher growth in the mid-1990s. The reforms of the late 1990s showed up in higher growth in the mid 2000s. So let us step back, think of the bigger picture, and not lose sight of secular trends. The unfinished agenda and implementation concerns remain challenging and problematic. Pessimism leads to despondency but optimism can augur a better future.
NK Singh is a member of the BJP and a former Rajya Sabha MP. The views expressed are personal