Growth may pick up but concerns remain

Growth may pick up but concerns remain

India may well clock the highest growth rate globally, but more is needed to create jobs and reduce poverty :-

SECTORAL TRENDS

• The monsoon has been somewhat below expectations — the overall rainfall deficiency was 3% (as of July 25).
• There were 11 meteorological divisions (of a total of 36) which were deficient.
• The area sown has come down.
• There is no consensus on the future behaviour of the monsoon. Agricultural growth may at best be equal to what it was last year — 3.4%.
• The services sector may perform better because public expenditure will be maintained at a high level.
• The data for the Index of Industrial Production (IIP) for the first quarter show substantial improvement over the corresponding period of the previous year. But the correlation between the IIP and national income data on manufacturing is poor.
• Some sectors (automobiles and railway freight traffic) and the combined revenues and profit of 370 large companies have shown better performance in the first quarter.
• The problems of the Goods and Services Tax (GST) may have been largely overcome, but it is still a work in progress. A pick-up in the growth rate in the manufacturing sector is likely.
• Overall GDP indicates a strong pick-up in the last quarter of 2017-18. If this momentum is maintained, the growth rate (2018-19) will certainly be above 7%.
• International financial institutions have forecast a growth rate of 7.3%. The Reserve Bank of India (RBI) expects it to be 7.4%.

External environment

• As a result of ongoing trade wars, the U.S. has raised duties on several products such as steel and aluminium, and on certain products imported from China which makes China retaliate and India has also been affected.
• Besides these, there are country-specific sanctions such as those against Iran, which have a direct impact on crude oil output and prices.
• As a net importer, India’s balance of payments can take a beating if crude prices rise again.
• India’s current account deficit was as low as 0.6% of GDP in 2016-17. It rose to 1.9% of GDP in 2017-18, mainly because of crude price rise. India’s trade deficit has always remained high.
• To counter this, there is an inescapable need to raise our export growth rate.
• In this context, we need to ensure that the rupee does not appreciate in real terms.
• The RBI should act only to ensure that the adjustment is smooth and there are no violent fluctuations
• Improved efficiency in production and better infrastructure are equally important.
• Maintenance of domestic stability also plays a key role.
• Over the medium term, we need to search for an alternative fuel.

Reviving the banking system

• The RBI’s latest report on financial stability shows that the gross non-performing asset (NPA) ratio of scheduled commercial banks rose to 11.6% (March 2018). The ratio for public sector banks was 15.6%.
• Because of this high NPA level, the credit to the industrial sector has slowed down considerably.
• Recapitalisation of banks has become an urgent necessity which could impose a serious burden on the fiscal position.
• Suggestions, including asset reconstruction companies, have been made to resolve the NPA issue.
• Medium-term banking reforms will have to wait until the immediate problem is resolved.

Impact on the Fiscal

• So far in the current year, the Central government’s fiscal has been within limits.
• At the end of the first quarter, the fiscal deficit as a percentage of total deficit for the year as a whole was 68.7% — a strong improvement over the deficit in the corresponding period last year.
• Among the two aspects of the fiscal which need to be kept under watch, one is related to GST and the other relates to the impact of the proposed Minimum Support Prices (MSPs) for various agricultural commodities.
• As GST revenues are currently running behind budgetary projections and there is no clarity about outstanding refunds. Any significant shortfall can put the fiscal under stress.
• The MSPs have been raised sharply in the case of some commodities. Except in the case of rice and wheat (where there is unlimited procurement at MSPs), there is no indication of how the MSPs will be implemented in relation to other commodities.
• In case the market prices fall below MSPs, either the State pays the difference between market price and MSP or the government to procure excess production over normal production so that market prices rise.
• The possibility of cutting expenditures if revenues fall below projections is remote in a year before elections.

Despite having highest expected growth rate ( 7.3-7.4% ) in the world economy, it falls short of our potential. Knowing that the external environment is not helpful, a stronger push towards a much higher growth is very much the need of the hour.

Sourece : The Hindu