Acche Din For Economy? India Ratings Predicts 7.9 Percent Growth In 2016-17

What can be the factors driving this growth? What can be the factors which may hold India back?

It is not just international lending agencies which are gung ho about the prospects for the Indian economy. Rating agencies, too, appear to share similar sentiments.

The World Bank’s Global Economic Prospects 2016 report said India would grow 7.7 per cent in 2016 and the International Monetary Fund’s World Economic Outlook update has re-affirmed its October prediction of a 7.5 per cent growth.

Now a just-released review of the economy by India Ratings & Research, a Fitch group company, is even more optimistic and says the Indian economy could come within touching distance of the eight percent mark – 7.9 percent in 2016-17. This is a tad higher than the chief economic adviser’s own assessment; the Mid-Year Economic Analysis 2015-16 said growth in the current year would be 7.7 per cent and would likely remain at the same level next year. “The Indian economy once again appears to be at the doorstep of a new growth run,” the India Ratings note says.

The constant sceptics will, of course, question how this is possible. Exports are down, manufacturing is down, agriculture is down, NPAs are up, fiscal deficit is up – where on earth can the growth come from, they are asking, even as they question the methodology behind the calculating the gross domestic product (GDP).

The note says domestic demand will drive growth in 2016-17. Private final consumption expenditure, it estimates, will grow 8.4 percent in 2016-17 against a likely 8.3 percent in 2015-16. After all, inflation is low, the Reserve Bank did cut interest rates and the incomes of government employees (and ex-employees) are set to rise with the implementation of the Seventh Pay Commission award and the one-rank-one-pension (OROP) scheme. The poor monsoons have not overly affected rural demand; the note points out that rural income appear to be fairly well-insulated against monsoon and crop failures.

The share of agriculture in the net value-added, it shows, has been declining steadily – from 70.5 percent in 1970-71 to 39.2 percent in 2011-12. On the other hand, the share of non-agricultural activities has been rising – from 29.5 per cent to 70.1 percent over the same period.

This demand-driven growth will be broad-based across sectors. It sees definite signs of an “incipient industrial recovery”, with gross value added (GVA) in industry to grow 7.6 per cent in 2016-17 against 7.3 per cent in the current fiscal. There are two reasons for its optimism. One, announcements in the two earlier budgets of the Narendra Modi government addressing issues dogging industry and the infrastructure sector are beginning to see traction on the ground. Two, the Make in India programme and the ease of doing business initiatives.

Agriculture growth is estimated at 2.2 per cent in 2016-17. And what of the unpredictable monsoon? The India Ratings note is not too worried on that score. There has been no past instance of three consecutive monsoon failures, it points out, adding that 2016 is expected to see the La Nina effect, a climatic condition that brings ample rainfall.

But this growth isn’t axiomatic nor will it be easy to sustain it.

The note points out that the recovery in investment demand is still fragile, pointing to issues like capacity under-utilisation, rising inventories, stressed corporate balance sheets burdened by high debt. In such circumstances, the onus of reviving investments, India Ratings avers, is on the government.

While inflation is softening, the note points out that “the inflationary challenge is far from over”. Food inflation is particularly volatile and drives both wholesale and retail inflation. India Ratings, therefore, stresses the need to address the structural issues plaguing agriculture.

Another stumbling block is the banking sector which is caught in a cleft stick – rising bad loans and the need to provision for them makes banks reluctant to lend to those looking for credit (most of whom have low credit worthiness) while those they are willing to lend to are not borrowing for investment. The Strategic Debt Restructuring process and a steady rise in GDP could, the note says, help the banking sector address its problems.

Sustaining growth in the medium term, the note says, will be a challenge also because of the poor quality of labour and declining labour productivity. “If India has to achieve 9 per cent growth, then it will have to raise its labour productivity growth by 73.8 percent over the rate achieved in FY15,” it says.

How is all this to be achieved? Big ticket reforms – GST, labour law amendments, land acquisition law changes – are, India Ratings acknowledges, necessary. Instead of getting stuck in pursuing just these reforms, the note suggests that the government move full tilt on a number of small ticket reforms – regulatory authorities for the rail, roads and real estate sectors; expansion of the direct benefit transfer scheme; recapitalisation of public sector banks; scaling up of strategic oil reserves; modifying hydrocarbon exploration from a cost-recovery to revenue-sharing model; pushing ahead on the bankruptcy code; setting up of commercial benches in courts.

Many of these have been talked about for years. The Modi government is running out of time to bring about an economic recovery. It needs to hunker down and focus all its energies on these.