Growth yes, just not for all

Subir Roy
Senior economic analyst

In response to a question at a Washington press conference a few days ago, an IMF spokesman said, ‘India has, of course, been one of the world’s fastest growing large economies of late, with growth averaging above 7 per cent over the past five years.’ He then outlined the achievements and what needed doing to keep up the momentum.

This is a reiteration of what emerged last August from the yearly bilateral article IV discussions between the IMF and India. The results of another detailed review will be available next month with the release of the World Economic Outlook. Meanwhile, it is useful to go over what emerged from the August review.

The review notes that following disruptions caused by the November 2016 demonetisation and the July 2017 introduction of GST, growth slowed to 6.7 per cent in 2017-18, but a recovery is under way. The review projects the growth rate for 2018-19 to be 7.3 per cent and move higher to 7.5 per cent the next year (2019-20). Thus ‘the near term macroeconomic outlook is broadly favorable’.

It noted headline inflation at 3.6 per cent for 2017-18 was at a 17-year low and went on to attribute this to low food prices, subdued demand and currency appreciation. But with demand recovering and oil prices rising, headline inflation is moving closer to the upper end of the RBI’s target band. Simultaneously, external vulnerabilities have risen. With rising imports and oil prices, reserves have gone down after peaking at $424.5 billion. The current account deficit is expected to widen further to 2.6 per cent on rising oil prices and strengthening demand.  

Against this largely positive scenario, the review outlines the following challenges — persistently high household inflationary expectations and large fiscal deficits. Ominously, it notes that systemic macro-financial risks remain as weak credit growth and the vulnerabilities created by the government ownership of banks can impair growth prospects. While economic risks like shortage in GST collection and addressing the twin balance sheet problem are seen to be going down, external risks are pointed upwards. The latter emanate from a further rise in oil prices, tighter global financial conditions and a spillover from trade conflict and regional geopolitical tensions.   

Regarding what the government has been doing, the review notes that financial sector reforms have been undertaken to address the twin balance sheets problem by speeding up the cleanup of bank and corporate balance sheets. But continued fiscal consolidation is needed. This can be achieved through working for greater GST compliance and simplifying its procedures. In view of the inflationary risk, further gradual tightening of the monetary policy is likely to be needed. There is a need to continue with the present flexible exchange rate policy with intervention limited to addressing disorderly market behaviour. What this means is that a fetish should not be made of a strong rupee.

The review does some plain speaking on the state of public sector banks. There is a need to speed up the action on the balance sheet front. It is important to improve governance, internal controls and operations of public sector banks, including considering more rapid end to public ownership. Tough advice, but then, the IMF does not have to go for re-election periodically.

While the foregoing is mostly unexceptionable, the review outlines three additional action points which can be contentious or on which the government’s head could be turned the other way. One, further liberalise capital flows, particularly foreign direct investment. But in the run-up to the elections, the government has been raising tariffs and creating an exclusive space for domestic business. Two, modernise labour laws (read hire and fire) — a perennial prescription. This will supposedly increase formal employment, particularly of women. But labour market flexibility, without mandated improvement in welfare measures, will not lead to better job quality which goes with formal employment. Three, take forward land reforms. Consolidation of holdings will improve agricultural productivity. But land reforms to facilitate infrastructure investment can lead to farmers and tribals losing their land more easily. This is not the path to inclusive growth. 

The fact that a comment by the IMF was sought and obtained on the government’s record of macroeconomic management in the run-up to the polls, invites a comparison with the record of the previous regime. In the four years before the present government came in, the UPA regime recorded an average GDP growth of 7.2 per cent, and during 2000-09 the average was 6.9 per cent. NDA-II has done well on growth, but so had NDA-I and UPA. But it is in inflation management that NDA-II has really scored. During 2010-14, average inflation was 9.6 per cent, whereas in the next four years under NDA-II it was just 4.7 per cent. Low inflation is the result of a rise in farm productivity and output, plus the government’s management of agricultural prices by controlling India’s international trade in them. This has been a boon to non-farm consumers and equally stressful to those earning their livelihood from agriculture.

Since the IMF review stresses inclusive growth, it is important to ask how well the government has done on that score. The widespread rural distress tells us a lot. The wages of demonetisation, to some merely a blip in the growth rate, has been traumatic for those who earn their livelihood in the unorganised sector, where accounting is rudimentary and business mostly done in cash. Add to this the dismal situation on the jobs front. The bottomline — NDA-II has done well on growth and prices, but this has not helped most of the poor.