The Prime Minister Narendra Modi led BJP government has completed 18 months at the center. India registered an impressive 7.4% yoy GDP growth for the July-Sep’15 time period. Whilst the government can take pride in the top line growth, the estimate continues to defy ground reality given the anemic industrial production growth, loan growth and exports not to mention lackluster readings from PMI. These indicators suggest that growth is well below trend.
When the Modi government was elected to the Center it assumed power with massive expectations of big bang reforms; thus equity markets soared and sentiment was rightfully upbeat. This was for the most part justified as India had experienced a prolonged era of below trend growth and high inflation under the Congress government. Mr. Modi’s electoral promises included a GST bill, structural land and labor reform bill, and accelerated public disinvestments but he soon ran into trouble as the government’s high handedness and alienation of certain states handed him huge defeats in the all important Delhi and Bihar state elections. This was a huge set back to the ruling party and for reforms.
Whilst the government will most definitely face major headwinds with land and labor reforms as they relate to the poorest sections of society, and will face resistance from the opposition parties, the government is making some headway on GST with recently announced panel recommendations. The GST panel, headed by the chief economic advisor, submitted its recommendations on the revenue neutral rate (RNR). The recommendations brought the bill one step closer to getting passed in parliament as it addressed the key concerns raised by the opposition. The RNR is recommended to be 15.0%-15.5%, which is much lower than market expectations of about 25% and effectively deals with the 18% cap sought by the opposition party but time will tell if it will get eventually passed.
The other major government initiative that has not yet met its mark is the “Make in India” drive. Although the initiative sought to boost manufacturing growth from 12% to 14% per year by appealing to more overseas businesses to set up manufacturing operations in India, manufacturing growth has hardly shown any expansion. Manufacturing growth continues to be stuck in the low single-digit levels.
One of the major tailwinds for the Modi government is about to turn into a headwind once again. The decline in commodities, particularly oil was part of that huge gift afforded to the government. Commodities are cyclical and eventually supply will catch up to demand. As a result a large part of the commodity decline is probably behind us. Hence, commodities importers such as India are unlikely to experience further income gains and falling inflation on the back of lower commodity prices.
The RBI in its most recent press conference reiterated that upside risks to inflation will be taken very seriously. The RBI has mandated to contain inflation in the 2%-6% range. Hence, with the last CPI reading at 5%, it doesn’t look like the RBI has much flexibility and should continue to exercise extreme caution. Thus the RBI can no longer come to the government’s rescue either to steer growth.
In summary, it doesn’t look like the real economy has undergone any major reform based transformation under the Modi government. Whilst Mr. Modi has proven to be an able administrator in cutting bureaucracy at the highest levels, the government has been unable to get any key structural reforms of the ground. While this government has been more successful than the Congress government in attracting FDI to usher growth, it still begs the question, “Did the Modi government just get lucky with low commodity (oil, coal, copper, steel) prices?” that helped to lower current account deficit, lower inflation and stabilize the currency. While this government has been under performing, it remains to be seen in which direction the country will progress in coming years. In order for markets to respond positively and growth prospects to improve, the Modi administration will have to deliver even more effectively and timely on what it has promised.
* Author is Managing Associate, CPPR – Centre for Comparative Studies. Views are personal