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While expectations are still high regarding the Modi government on the economic front, no rabbits have been pulled out of the hat yet. Some favourable factors have emerged which may help in the revival of the economy from sub 5 per cent GDP growth to a higher growth trajectory.
The best news so far has been that industrial growth picked up to 4.7 per cent in May 2014 but unfortunately went down to 3.4 per cent in June. In any case it is indicative of an industrial revival. Exports grew at 12.4 per cent in May but slowed to 7.3 per cent in July. Import growth first declined (after the rise of duty on gold) but has increased to 4.5 per cent in July. The trade deficit was at $12.22 billion in July. The rupee, however, has been stable and has helped exports. Car sales considered a driver of industrial growth has gone up by 5 per cent in July.
The FDI inflows declined by 45 per cent in the last quarter of FY 14 at $3.96 billion but FII inflows crossed $25 billion since January 2014. This indicates that foreign investors are bullish about India's growth potential but as is well known, FIIs are fickle and move around the world.
The core sector growth index was up by 7.3 per cent in June. There is an increase in iron and steel production by 4.2 per cent and cement production went up by 13.6 per cent. Construction and infrastructure are picking up due to the incentives offered in the Budget and an easing of regulations.
The corporate sector has also shown better results in the first quarter (April to June 2014). Over 1,204 companies have registered a substantial growth of 33.4 per cent in the first quarter and net profit margin rose by 11.3 per cent. Sectors like IT and pharmaceuticals have been good performers.
The monsoon deficit is also slowly shrinking and there is hope for a normal agricultural production though agricultural growth will be much less at 1.3 per cent and lower than the targeted rate of 4 per cent.
With America's GDP growth picking up to 4 per cent in the last quarter, there is hope for global recovery and the demand for services looks rosier. Growth is back for the big five: Infosys Technologies, Wipro, Cognizant Technology Solutions, HCL Technologies and TCS. They are hiring more people and additional jobs of 160,000 to 180,000 will be created in the next one year.
Yet the domestic investment scene does not look too promising and the RBI has left the repo rates unchanged in its latest monetary policy. It has cut the SLR (statutory liquidity ratio) by 50 basis points to 22 per cent. This is likely to pump in an additional liquidity of Rs 40,000 crore into the financial system. A cut in the repo rates would have lowered interest rates and could have encouraged new investments. But the RBI is not confident about the monsoon and its impact on food prices. Inflation control is the prime target of the RBI and till it is sure that inflation will come down to 6 per cent, no change in the repo rates may be expected. The Consumer Price Index was at 7.3 per cent in June and rose to 7.9 per cent in July.
New investments in the manufacturing sector for the quarter ending 2014 have dropped sharply by 72 per cent on a year-on-year basis. Only 50 new projects have been announced with an estimated investment of Rs 180 billion. This has been due to the slowing of industrial demand and substantial amount of capacity addition since 2008-09 as well as the pipeline of additional capacity carried on from past projects that have not been completed. These have made industrialists cautious and diffident in making fresh investment.
Another area of concern is the falling savings rate to 30 per cent of the GDP from 38 per cent in 2008, and the government has to look into it because unless the savings rate is higher, investments will also slow down further.
On the basis of the positive signs many are predicting 6 to 7 per cent GDP growth rate. But 22 per cent of the people are still extremely poor and their children suffer from malnourishment. According to the recent Human Development Report (July 2014), 55.3 per cent Indians suffer from multi-dimensional poverty, which includes multiple deprivations in the same household in education, health, sanitation and living standards.
India has not done well on the Human Development Index and ranks at 135, according to the latest report. HDI has remained the same at 0.586 in 2013 as in 2012. A new Gender Development Index, defined as a ratio of female to male HDI, has ranked India at the 132 position. The Gender Inequality Index shows only 28.8 per cent labour force participation by women.
There is a shortage of 15 million houses for the low-income groups and lack of good infrastructure for solid waste disposal and sanitation in cities. Today's life in cities is hardly conducive to peaceful and healthy living and the common person may well wonder: "Has there really been a change in two months?" Since problems are so big, there is no possibility of change in the short term. The problems require a genius to undo the harm done over the years to India's administrative machinery, judiciary and political set-up. If only one thing can be solved, namely corruption, it would be a big achievement for the Modi government. According to The Economist of London, $4-12 billion has been paid as bribes to politicians and officials in the past decade.
On the job creation front, there is need for higher manufacturing growth and the creation of 'decent' jobs and not just menial jobs of security guards and peons as around 10 million people will be enter the job market each year over the next decade. Around 90 per cent people still work in the informal sector which is in need of better conditions of work and a social safety net.
By Special Arrangement with : Observer Research Foundation (www.orfonline.org)