Column: Balance short-term risks with growth

May 23 2014, 21:16 IST
Comments 0
SummaryThe government must create fiscal room well in advance for absorbing the effects of a probable drought.

FY15 might just prove a game-changer for the Indian economy, what with the new government ready to take order. The government’s “to do” list is a long one. It must urgently announce policy and administrative measures that improve the investment climate and boost growth. And it must do so while addressing the risks unfolding now. A decisive election mandate has provided it the ability to address these issues more effectively.

A fragile upside

Growth in FY15 most certainly has an upside from where we stand today. According to CRISIL Research, GDP growth can rise to 6% in the base case this fiscal, assuming normal monsoons, a stable government and a widely anticipated global recovery. With elections concluding on a positive note for reforms and swift decision-making, the risk of a fragile mandate is out of the way. The general election results have bolstered confidence in the equity markets and raised expectations. Kick-starting the economy will, however, require much more than this. To top it all, since we began this fiscal, risks have started to build threatening to derail the economy off the path towards 6% growth.

A high-probability risk for this fiscal is of weak monsoons pulling down agriculture GDP growth and stoking inflation. The Indian Met estimates a 60% chance of an El Niño materialising this year. Data for the past two decades shows a 30% likelihood of an El Niño condition morphing into monsoon failure. If the monsoons are adversely affected, GDP growth can fall to 5.2% this year. This will call for immediate steps to cushion consumption spending, especially in rural India.

Turning the ship around

The government’s top-priority should be to try and revive the economy. Unfortunately, the economy cannot be revived via short-term stabilisation tools such as interest rate cuts, and fiscal spending—inflation and fiscal deficit are outside the comfort zone. The government, therefore, needs to improve the business climate by hastening pending reforms, bringing in clarity on land acquisition and environmental clearances and working towards improving the ease of doing business in India in double quick time. The key imperatives are:

* Exercise fiscal discipline, boost growth: Fiscal consolidation should be achieved through reducing subsidy spending and adopting revenue-enhancing measures such as the goods & services tax (GST). On the other hand, to support growth, the government must increase productive spending. As per a recent Crisil Research report, in the last 2 years—FY13 and FY14—productive spending (capital

Single Page Format
Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...