In the run-up to what will be the last full-fledged budget of the Narendra Modi government, there has been a significant shift in the economic landscape from the time the NDA came to power in May 2014. Estimates of the Central Statistical Organisation (CSO) show that Gross Domestic Product (GDP) will grow at 6.5 per cent in FY18 — a four year low and much below the RBI’s growth forecast of 6.7 — in what is further confirmation of the current slowdown. The secular decline in growth since 2015-16, 8 per cent that year, 7.1 per cent in FY17 and the estimated growth of 6.5 per cent in FY18, could mean that this NDA government may be on course to reporting a lower average growth over its five-year term next year than the 7.1 per cent of even UPA 2, which it has attacked often for economic management.
The CSO estimate is also a reflection of the fact that the two so-called structural reforms pushed by this government — demonetisation and GST — have weighed heavily on the economy. Looking back, it now appears that the government may have erred in not having pushed the pedal on reforms in the first two years of its term when it enjoyed a bonanza in terms of low oil prices compared to past governments. For, that period, marked by stable macro indicators, offered a great opportunity to address the twin balance sheet issue. That was when there was enough elbow room, both fiscal and monetary, for the government to carry out serious repair work. By leaving it late, and considering the fact that there is little or no flexibility on both these counts for a counter-cyclical policy without breaching the fiscal deficit targets, and with its attendant risks and the fact that 2018 will be marked by several assembly polls, a rebound in growth next fiscal, if at all, may kick in only in the second half of FY19. And if growth sputters next fiscal, too, there could be a political cost — with national polls in 2019.
Unlike many other governments, this government has been perceived as fiscally conservative and staying the course on fiscal consolidation. It is a moot point as to whether this would have been the case without low oil prices. Having enjoyed that for a good part of its term, it is difficult to escape the feeling that NDA 2 may have squandered an economic opportunity at a time when there has been a synchronised recovery in global growth after the financial crisis of 2008. Contrast that with the record of NDA 1 which, after facing severe challenges, left an economy in much better shape, which the government that succeeded it, the UPA, built on. This government would be better off if Prime Minister Modi expends his considerable political capital on reviving growth.