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IPA Special
India yet to be rid of demonetisation havoc
By S. Sethuraman
As India wallows in the post-demonetisation mire, the global growth is accelerating to 3.6 per cent in 2017 and 3.7 per cent in 2018 with pickups in investment, trade, and industrial production in advanced and other emerging economies, coupled with strengthening business and consumer confidence.

India is singled out among leading emerging market economies with a downward growth projection for 2017 at 6.7 per cent and 7.4 per cent in 2018. According to IMF's October WEO, the revision is due to slowing growth, reflecting the "lingering impact of the authorities' currency exchange initiative as well as uncertainty related to the midyear introduction of the country-wide Goods and Services Tax"

Global growth outcomes in the first half of 2017 having been generally stronger than expected, upward revisions are made to the euro area, Japan, China, emerging Europe, and Russia. This has put India below China's 6.8 per cent in 2017 by 0.1 per cent though India is projected to being ahead again in 2018 with 7.4 per cent over China's 6.5 per cent (estimated).

India can draw some comfort from IMF's long-term projections for global economy (2017-22) envisaging fast growth in two largest countries China and India, which account for more than 40 percent of GDP and over 40 percent of the population of emerging market and developing economies.

GST, with promise of unification of India's vast domestic market and other key structural reforms under implementation or proposed are expected to help push growth above 8 percent in the medium term, IMF said.

While strong government spending and data revisions in India led to an upward revision of 2016 growth to 7.1 percent, the growth projection for 2017 has been revised down to 6.7 percent from 7.2 per cent. WEO said this reflected besides the "still lingering disruptions" associated with the currency exchange initiative introduced in November 2016, the transition costs related to the launch of GST in July 2017.

Some reliefs announced on October 6 for small and medium enterprises and exporters may help them to a limited extent, for the immediate, but GST needs to be simplified, as RBI points out, while for growth going forward, business investment has to be reinvigorated. Recapitalising public sector banks adequately necessary to ensure credit flows to productive sectors has also been urged in the recent monetary policy statement.

At a time (in terms of GDP), nearly 75 percent of the world is experiencing an upswing, the broadest-based acceleration since the start of the decade, India is not in the race, missing more jobs and improving standards of living for people at large. India instead has come under the category of countries having lost the earlier growth momentum. Though GDP growth did not turn negative, India is also yet to make its growth inclusive such as to at least arrest growth of inequalities.

India's growth also comes partly from being a commodity-importing country. But India has not so far been able to take adequate advantage of the improved global trade outlook at present for exports which contribute some 20 per cent to GDP growth. IMF has projected trade volumes to grow from 2.4 per cent in 2016 to 4.2 and 4.0 per cent over 2017 and 2018.

Exports of EMEs and other developing countries are expected to rise from 2.5 per cent last year to 4.8 and 4.5 per cent in these two years and imports to grow from 2 per cent in 2016 to 4.4 and 4.9 per cent respectively. Unless there is a breakthrough in our export drive, trade and current deficits would widen posing risks. IMF has projected India's current account deficit at -1.4 per cent of GDP in 2017 and -1.5 per cent in 2018.

China's policy easing and supply side reforms have enabled it to grow at expected 6.8 per cent in 2017 over India's 6.7 per cent but revised IMF estimate corresponds to the RBI/MPC downgrading to 6.7 per cent from their earlier assumed 7.3 per cent for 2017/18. The World Bank and Asian Development Bank have also brought down growth estimate to 7 per cent in 2017.

At the same time, IMF has also cited financial stability risks in China with its higher debt trajectory, and diminished fiscal space available to respond in case of an abrupt adjustment. Unless the Chinese authorities counter the associated risks by curbing credit expansion, there could be a heightened probability of a sharp slowdown in China's growth, with adverse international repercussions through weaker trade, commodity prices, and confidence.

For India, the WEO has again drawn attention to Product and Labor market regulations and trade policies, and says simplifying and easing labor market regulations and land acquisition procedures are long-standing requirements for improving the business climate.

Such structural reforms are unthinkable at present for Prime Minister Narendra Modi, who had so far deferred them, and is currently focused on winning votes in state elections and the 2019 Lok Sabha poll. Mr Modi was showering goodies to keep faith with the people of Gujarat he has ruled, (2002-2014) faced with a seemingly stiff challenge from Congress led by Mr Rahul Gandhi for the impending Assembly poll.

The Prime Minister sold to a credulous public, the limited improvements in simplifying GST as "Diwali Gift" and claimed all such measures were designed to create a "Swachh and Strong Economy for a new India". Rarely, Mr Modi talks of jobs - the biggest shortcoming in his 40-month reign so far - or lack of private investment or systemic banking mess or other basic issues affecting the people at large.

Instead, his route to promote social equality is to digitalise Rural India. To him the levels of poverty, illiteracy and lack of economic and social opportunities are no insuperable obstacles in effectuating his decisions.

Finance Minister Arun Jaitley, ahead of his visit to Washington to attend the annual meetings of IMF-World Bank (October 10-15), has been trying to tell American audiences via video conference that India is well set on the path of attaining faster growth and accomplishing structural reforms like "one nation, one tax" GST despite difficulties that had arisen in its implementation.

His assertions that demonetisation had had positive effects and improved the economy would hardly sound convincing unless the damage done to the small-medium scale sector and loss of millions of jobs in the most vital segment of economy are to be set aside as of no consequence.

—(IPA Service)

News Updated at : Friday, October 13, 2017
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