Economic Highlights

New Delhi, 30 October 2015

WB Thumbs Up

NOW FOCUS ON VITAL ISSUES

By Shivaji Sarkar

The World Bank report pushing India 12 ranks up in doing business – 130 from 142 - is a shot in the arm for a country which has been trying hard but couldn’t get recognition, at least within the country. It is a clear pointer that government policies do matter. And, Prime Minister Narendra Modi’s policies, the report states, have boosted the confidence of the business community across the globe.

The report has even led the World Bank’s Chief Economist Kaushik Basu, who was earlier chief economic advisor to Manmohan Singh government, to comment that the country can be among top 100 in a year. This also raises the question whether India can really do so well and whether high expectations of reform -- infrastructure, fiscal deficit, “restrictive’ labour regulations and financial sector -- would be achieved. Another question is whether the government can achieve all this without giving a boost to the farm sector.

Importantly, Basu underscored the role of the bureaucracy in aiding or hindering the process of bringing a more streamlined system. He, it seems, too has doubts about it as many others. But if Finance Minister Arun Jaitley is to be believed the bureaucracy has been put on track and the most necessary tax reforms are being worked out. Basu also seems to echo the notion as he noted that the “bureaucracy is now coming together with the political leadership in the country to try to effect an important and positive change”.

Among others, the World Bank Chief Economist wants ports, roads and infrastructure to be addressed. And these are being addressed through various programmes, assures the Prime Minister. While the right moves are being sounded, the financial sector reforms are too largely in place, stress both Basu and Jaitley separately. This has seen positive sentiments in the market, vast reduction in fraudulent practices and largely a stable sector, if not booming.

In a previous report, the WB noted the complex nature of the labour system. While it emphasized on its streamlining, it also stated it did not advocate a regime of “automatic hire and fire” though that is what the vast majority of workers in unorganized sector actually face.

Despite this, numerous foreign companies are setting up their facilities in India on account of various government initiatives such as ‘Make in India’ and ‘Digital India’. Modi has launched the former initiative with an aim to boost the manufacturing sector of the economy. This is expected to increase the purchasing power of an average Indian consumer, which would further boost demand, and hence spur development, in addition to benefiting investors. Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.

Both manufacturing and agriculture contribute about 15 per cent to the GDP. It is now proposed to increase manufacturing contribution to 25 per cent in the next few years. But Modi has also to lay similar stress on agriculture if the “mission growth” has to go in the right direction. The farm sector sustains almost 80 crore people and the manufacturing a far smaller number. This apart, without rural growth dependent on the farm sector it would not be easy to achieve the “manufacturing mission”.

Stronger farm activities would boost rural incomes and create demand for manufactured goods. This is somewhat tepid. The government, of late, has been toying with the idea but policy formulations have yet not been done.

The country has also seen larger support emanating beyond its frontiers. The recent Afro-India meet of 50 African countries in New Delhi is a testimony that India enjoys their trust. Africa, as Sudanese Foreign Minister Ibrahim A Ghandour says wants India to lead a change in the world order as also the reforms in UN Security Council.

However, this is happening not just because of diplomacy. There are bright signs in the Indian economy. Even among the BRICS stock markets, steep dive is seen in Brazil, Russia and South Africa. It is booming only in India and China. The large FII investments in India could be turned into brick and mortar investment in due course.

The falling commodity prices will have a smaller impact in India than on Russia, Brazil, South Africa and many western countries. India largely is not a commodity exporter. The effect of reduction of commodity prices is not limited to exports. It has an impact on imports and production costs as well.

The fall in oil prices though is creating turmoil in the Gulf region, India’s oil bill has halved to $ 50 billion from $100 billion some months ago. This saves five per cent of the GDP almost equal to the country’s fiscal deficit. This helps Jaitley to aver that the government would achieve its goals despite the deficit.

The International Monetary Fund (IMF) and the Moody’s Investors Service have forecast that India will witness a GDP growth rate of 7.5 per cent in 2016, due to improved investor confidence, lower prices and better policy reforms. Besides, according to mid-year update of United Nations World Economic Situation and Prospects, India is expected to grow at 7.6 per cent in 2015 and 7.7 per cent in 2016. By 2025 the Indian economy is projected to be about 60 per cent the size of the US economy.

This notwithstanding, there are many problems that the Modi government has to address particularly on the consumer prices, according to the World Bank. Despite this there is hope for India. Its competitor China is likely to slow down as its wages are increasing and its exports are becoming expensive.

It goes without saying that the moment of rapid development awaits India provided it can address some of the critical issues such as multiple taxes, difficult processes in registering property, trading across State borders and protecting minority share holder interests. It has possibly to start from the national capital region (NCR) where movement of goods and people are restricted by strange laws of adjoining States.

The Goods and Services Tax (GST) also is not an easy issue to resolve. But it can be done by States agreeing to have uniform rates across the country even without a Central legislation. Expecting the muck of 70 years to be cleared in 18 months is a tall order. But as the World Bank points out the direction is right and India has the potential to do better in the coming years. --INFA

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