The latest official industrial production and consumer price index (CPI) data reinforces the central fact that growth in the Indian economy remains weak, even as inflationary pressures have clearly subsided. This, notwithstanding the relaunched national income accounts series generating fairly robust GDP growth estimates and the new CPI with a revised reference year (2012) showing inflation to be marginally lower than that computed using the old 2010 base. The industrial output numbers, in fact, reveal the average year-on-year growth at 0.5 per cent during October-December to be below the corresponding 1.3 and 4.5 per cent rates for the preceding two quarters. These are consistent with other evidence — from dismal quarterly results of companies and flat excise revenue collections to poor bank credit offtake — that also point to an economy starved of any fundamental growth impulse or investments needed for job creation.
This situation is unsustainable, more so for this government, which has just tasted a crushing electoral defeat in Delhi. It may have been just one verdict in a not-so-big state, but the larger political and economic message cannot be missed: With the Narendra Modi government’s honeymoon period truly over, voters will now increasingly demand delivery of promises made during the Lok Sabha campaign. These essentially boil down to restoring growth and boosting investments, be it in power, roads, railways, irrigation, education, health or housing. And this would require a mix of fiscal stimulus and monetary easing; the focus should no longer be on their desirability as much as the extent and kind of such accommodation. On the monetary policy front, with inflation now well within 5.5-6 per cent, a minimum 50 basis point cut in the Reserve Bank’s repo rate is in order.
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The emphasis must shift from the fiscal deficit to the revenue deficit. The coming budget should set out a revised glide path aiming for an accelerated reduction in the latter to, maybe, 1 per cent of the GDP by 2016-17, as against the existing 1.6 per cent target. Simultaneously, it could keep the fiscal deficit target for 2015-16 unchanged at the current 4.1 per cent level. This moderate relaxation in rolling targets, alongside a more aggressive disinvestment programme to mop up Rs 1,00,000 crore or so, will enable a substantial increase in public capital expenditure to kickstart growth and investment activity. The revenue buoyancy accompanying an economic revival would lead to a further lowering of deficits.