DECEMBER 23, 2015

By TIOL Edit Team

WHEN Finance Ministry mandarins are a bit perplexed by economic indicators, the man in the street has reasons to worry about the promised Achhe Din. He is still waiting for real, inclusive growth, new jobs, trickle-down effect, growth-led peace and other feel-good factors.

The Mid-Year Economic Analysis (MYEA) 2015-2016 released by Finance Ministry on 18th December shows that economic growth is patchy & is unlikely to turn holistic and robust in next fiscal. This means that Modi Government would have frittered away first half of its term struggling to steer the economy effectively.

While the index of industrial production (IIP) has grown marginally faster in the first six months this year than the last, there is considerable variation in performance across sectors.

As aptly put by India Ratings, "the manufacturing growth in October 2015 should not be interpreted as a turnaround in the manufacturing sector because still a number of manufacturing sectors are saddled with excess capacity due to low demand. Also, several infrastructure companies are not in a position to undertake fresh investments due to their stretched balance sheets and the dwindling ability of banks particularly of the public sector to lend due to rising non-performing assets."

From the common man's standpoint, the real picture about economic growth would become clear when the Labour Bureau releases its annual employment and unemployment survey in the first quarter of 2016.

Says MYEA: "The economy is sending mixed signals with different indicators not always pointing in the same positive direction." The latest GDP estimates suggest that real GDP (prices adjusted one) in the first half of 2015-16 grew at 7.2 percent as compared to 7.5 percent in the first half of previous year. In contrast, nominal GDP (at current prices) growth declined substantially from 13.5 percent in H1 FY 2015 to 7.4 percent in H1 FY 2016.

It has rationalized the glaring divergence in growth rate of two GDP indicators through a labored elaboration of three technical factors that make measurement of GDP difficult and uncertain. It says: "This heightened uncertainty is intrinsic to GDP measurement at a time when large changes in relative prices are taking place."

Without going into complexities of GDP measurement, we can focus on the need for multi-facet policy initiatives to speed up growth to 10% per annum & sustain it to reduce unemployment, poverty and social tensions.

The foremost need is to end uncertainty in business milieu that results from frequent environmental orders and verdicts from courts and quasi-judicial authorities.

It is here pertinent to single out diesel vehicles at main culprits of air pollution in Delhi. This NGOs-driven belief has led a slew of judicial interventions such as hefty environment compensation charge (ECC) on trucks that pass through Delhi. Imagine what would happen if each State levies such ECC on trucks passing through its territory. ECC has the potential to kill the emerging concept of single Indian market as driver of economy's competitiveness.

The temporary ban on registration of passenger diesel vehicles of certain specifications would also give a setback to automobile industry. It is here pertinent to quote Mahindra & Mahindra Executive Director Pawan Goenka.

In an interview to Business Standard, Mr. Goenka stated: "We are consistently and faithfully meeting all the laws of the land. We are producing vehicles that meet the requirements that have been set out and the changed regulations either by the Supreme Court or by others and we have met those regulations however difficult or impossible they might be….Suddenly if we say that diesel engines cannot be made then those investments are down. And that does create the same case like Vodafone that got so much air time creates the same problems for us. Because this is not a stable business environment. When we make an investment we have to know that the investment will live out its life. So clearly those who want to invest in India in automotive will have to think twice."

Such unpredictable policy fiats from judiciary from mining to manufacturing to services sector can serve as permanent deterrent to robust economic growth. Modi Government must act fast on this issue by holding a policy turf discussion with the judiciary.

Another immediate challenge before the Government is to stimulate the private sector investment and reverse the unabated decline in export growth. The growth is currently sustained largely by step-up in public investment and private consumption.

We hope serious issues mentioned in MYEA are promptly resolved by the Government. The foremost need is to provide for both special policy and investment interventions in agriculture sector to mitigate the impact of drought and to aim for annual 4% growth in agricultural output.

An equally important area that deserves more initiatives is the revival and sustained development of mining sector, which is crucial for ‘Make in India' initiative.

Simultaneously, the Government should consider working comprehensive packages for industries that are in doldrums.

It is heartening to note to find mention of Tax Administration Reform Commission (TARC) in MYEA. It says that TARC Recommendations are under examination. "The recommendations that can be immediately implemented have been put on a fast track and other recommendations which are part of the medium term and long term goals are being implemented in a phased manner and are being monitored."

On the expenditure side, MYEA's silence on Expenditure Management Commission (EMC) is, however, worrisome. EMC submitted its interim report in January 2015 and is required to submit its final report before the Budget of 2016-17. The Government must not be lax in promoting expenditure efficiency and utilization of saved funds in productive activities.

To sum up, the web of factors affecting economic growth is too large and complex. The Government has yet to display dexterity to manage these factors optimally.