MODI@1: Economy report card shows many as and Bs, courtesy lady luck

By Pratigya Vajpayee and Shivani Karmarkar

NEW DELHI: The ghosts haunting the Indian economy for long seem to have been mostly exorcised, with the Narendra Modi-led government having had the devil’s luck on its side.

India’s macroeconomic scorecard does read a lot better now than it did a year ago. While there is a major improvement in indicators of inflation and the external sector, the much-needed signs of “achchhe din” or good days promised by the government have not yet played out completely in indicators of economic activity.

While giving due credit to the quality of the government’s policy making over the past year, one has to acknowledge its run of favourable luck, and the strong helping hand from a fall in global commodity prices.

“I think bringing down inflation is a result of good luck and good policies,” CRISIL Chief Economist D.K. Joshi said.

As the Modi regime completes a year, Consumer Price Index-based inflation rate is lower by over 350 basis points from a year ago, while that based on the Wholesale Price Index is firmly pinned in the negative territory.

Undoubtedly, the global fall in commodity prices, especially crude oil, was the largest factor that helped cool off the chronic high inflation in India, given the share of crude oil in India’s import bill.

India’s crude oil basket averaged at $84.16 per barrel in 2014-15 (Apr-Mar), down over 20% from $105.52 a barrel in the previous financial year.

Moreover, food inflation remained well behaved despite an errant monsoon last year.

Food inflation remained in check, again largely owing to a drop in global commodity prices, which hindered export of Indian food items, clamping down domestic prices.

The government also seems to have proactively released stocks of food grains into the market in order to prevent prices from heating up.

“…the government did show restraint as far as MSPs (minimum support price) are concerned and they did show proclivity to push food stock into the market and also check hoarding…which actually becomes rampant when there is food shortage,” Joshi said.

The government has also backed up its actions with the right noises, taming inflationary expectations.

Last June, which is usually a bad month in terms of inflation expectations, the government, soon after taking charge, went out of its way to assure masses that food prices would not get out of hand.

On one occasion, a post by Finance Minister Arun Jaitley on the social networking website Facebook led to a sharp fall in farm commodity futures, as traders were spooked by his warning against alleged hoarding of food products.

The inflation targeting framework pact signed between the Reserve Bank of India and the government also shows commitment towards a low inflation regime.

External sector is the other front where the fall in crude oil prices has come as a blessing for India.

The country’s current account deficit has shrunk to 1.7% of gross domestic product during Apr-Dec from 2.3% in the corresponding period a year ago. Portfolio flows in 2014 were nearly fourfold of those recorded a year ago.

The government’s contribution here was relaxation of foreign direct investment limits in various sectors such as railways, insurance and defence, while ensuring that the broad direction of policies was encouraging for investors.


Even several months after the government assumed charge, and its policies were unfolding, a key question continued to puzzle investors – how would the centre manage to clean up its finances, and at the same time deliver its promise of turning around the economy?

However, with global commodity prices dropping, major pieces of the puzzle fell in place.

Provisional estimates released this week showed that the government achieved a fiscal deficit of 4.0% of GDP in 2014-15 (Apr-Mar), slightly improving on its target of 4.1%.

Buying some more room in the 2015-16 Union Budget, the government redrew its fiscal consolidation roadmap, delaying its medium-term goal of 3% fiscal deficit by a year, in a bid to revive growth.

While many say that the end would justify the means, it is premature to judge whether the government’s fiscal leeway would be worth the while.

The quality of expenditure seems to have improved, with subsidy payouts declining significantly, which is just another piece of good fortune that the government owes to decline in oil prices.

Jaitley, who often criticised the previous government for slashing plan expenditure in its fiscal deficit chase, does not seem to have done a whole lot better. Plan expenditure in 2014-15 stood at 4.54 trln rupees, only marginally higher than 4.53 trln rupees the year before, and is lower than the revised Budget estimate of 4.68 trln rupees.

However, the one parameter which was widely expected to be swept by Modi’s magic wand was the pace of economic growth, which has not lived up to expectations.

Notwithstanding the rosy picture painted by the new series of GDP, other indicators of economic activity suggest only a slight uptick at best.

Although GDP growth is estimated to have risen to 7.4% in 2014-15 from 6.9% a year ago, indicators such as index of industrial production, core sector, and credit growth reveal a gradual pace of recovery.

Still, it is too soon for the verdict on growth to be out.

“On growth, the actions the government has taken–FDI allowed in insurance, defence, railway infrastructure, mining related laws, the Smart Cities initiative, various operating environment changes under Make in India will only show up in economic indicators over the next two to three years, rather than the next two to three quarters,” said Atsi Sheth, senior vice president at Moody’s Investors Service.

“From our perspective, resisting the urge to quickly stimulate the economy is positive because although it would have revived growth in the near term, it would have also added to inflationary, current account and fiscal pressures over the medium term,” she added.

There is other work that the government has done to uplift the economy, but does not show immediate results in economic parameters. This includes legislative steps to end stalemate on long pending issues such as allocation of coalmines, and goods and service tax.

The economy has had more ups than downs over the past year, but in coming years, the government would need to rely on more than just the assistance of lady luck.

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