Farming Sector To Drive Economic Growth

Is the business community uniformly feeling gung ho about the economy? Not quite, says the National Council of Applied Economic Research’s (NCAER) quarterly business confidence index (BCI); large firms seem more optimistic than medium and small ones.

The BCI has gone up 2.2 percent between April and July 2016 and 2.1 percent between July 2015 and July 2016, but this seems to be driven more by firms with a turnover of more than Rs one crore. The BCI of companies with annual turnover of less than Rs one crore declined by 9.1 percent between April and July.

Sentiments appear to be patchy across sectors, too. The BCI of the capital goods sector dipped quite sharply – 16.9 percent – between April and July, while that of the consumer durable sector also fell 4.9 percent. The sectors that appear upbeat are consumer non-durable (BCI up 13.5 percent) and intermediate goods (up 12.1 percent).

With exactly one week to go for the first quarter gross domestic product (GDP) growth numbers to be released, the economic picture is not as rosy as the government would like it to be. That’s the message coming out of an outlook report of India Ratings as well.

The report, Economy in Motion, But Growth Not Accelerating, strikes an optimistic note about GDP growth – it has pegged growth in this fiscal at 7.8 percent, up from its April forecast of 7.7 percent. It, however, flags the non-revival of investment demand as a major area of concern.

So, what are the areas of optimism? According to the India Ratings report, the biggest is agriculture. The first half of the monsoon season, it notes, has had normal rainfall and in July – the crucial month for sowing – rainfall was 6.6 percent above the long period average (LPA) area under kharif crops was, as of 19 August, 5.7 percent higher than the normal area. What’s more, an Indian Meteorological Department projection of seven percent higher rainfall than LPA in the second half of the monsoon period and water level in major reservoirs increasing to 61 percent of capacity, as of 18 August, from 17 percent of capacity on 26 May, also augur well for agriculture.

What’s notable is that the area under pulses has increased 39.38 percent than normal (taken as the average of the last five fiscal years), which should cool rising prices and, hence, food inflation after some time. However, prices of arhar may moderate only around the third quarter of this fiscal, even though area under cultivation is up 46.61 percent, because the production cycle is five months to one year. 

Consumption demand is also part of the good news – that alone will drive manufacturing growth, the India Ratings report says. This has begun to pick up in urban areas given the moderation in inflation as well as in interest rates. This could be supplemented not just by the handsome Seventh Pay Commission payout but also by a recovery in rural demand due to higher agricultural output. The second bit could be a tad optimistic – the rise and fall of rural demand usually comes with a lag, and it is quite possible that the revival could come only in the first quarter of 2017-18.

The report flags the lack of investment recovery; this, it says, is a key factor holding up the acceleration of industrial growth. Increased public investment in infrastructure will help only up to a point; the share of combined state and central capital expenditure is only 16 percent of total capital expenditure; the balance comes from the private sector.

It’s not as if the government has not done enough on the economic policy front or in terms of trying to revive private investment. The report mentions initiatives to push the ease of doing business, the UDAY scheme in the power sector and various steps to put agriculture on a sound footing. It also pats the government on the back for sound public finance management.

This is borne out by the NCAER survey as well. The political confidence index has fallen in July relative to April in overall terms, but has shown an increase in two components – managing the overall economic growth and managing government finances.  

If private investment is still not perking up, India Ratings says, it is because banks as well as companies are repairing their balance sheets, so banks are not lending and private companies are not investing. India Ratings estimates that 240 of the top 500 borrowers belong to the stressed and elevated risk of refinancing categories and will remain exposed to significant refinancing risk in this fiscal.

This is not something the government can do very much about.  There are other imponderables. Inflation is on the rise again and this could shrink the window for further rate cuts by the Reserve Bank of India.

Given this situation, the government should best concentrate its energies on the limited areas where it can have some influence – savvy inflation control measures and keeping a lid on fiscal and revenue deficits. For the rest, it should just refrain from doing anything wrong, which could rock the already not-so-stable boat.