Modi Government Fares Well on the Economic Front


As the Modi Government enters the fourth year of its term, its economic report card looks good. The government has many achievements to its credit. In 2013, the economy was in bad shape: growth had slumped to below 6 per cent, rupee crashed to 68.85 to the dollar on August 28, 2013 following the QE taper announcement, the twin deficit problem – high fiscal and current account deficits – rendered Indian economy highly vulnerable, and inflation was raging above 10 per cent. FIIs put India in the ‘fragile five’ group BIITS (Brazil, India, Indonesia, Turkey and South Africa) and sold heavily, impacting the currency and stock markets. Further more, policy paralysis in the last phase of the UPA Government had impacted business confidence and economic growth.

As the Modi Government enters the fourth year, the economy is in a much better shape. In the emerging markets, India is in a macro sweet spot. Indian GDP growth in 2017-18, which is estimated to rise to 7.4 per cent, is likely to be the highest among large economies in the world. The IMF last year referred to India as the ‘bright spot in the gloomy global economy’. Thanks to the fiscal consolidation in successive budgets, the fiscal deficit has been brought down to 3.2 per cent. Current account deficit at 1 per cent is not an issue at all. Rupee has strengthened to around 64.40 to the dollar. In the last 3 years, retail inflation averaged 5.2 per cent. Presently, CPI inflation is below 3 per cent. Exports, after three years of lackluster performance, have started picking up and India has emerged as one of the largest recipients of FDI in the world. Stock market is at record highs and investors, both foreign and domestic, are pouring money into the market. This transition from ‘fragile five’ to ‘fabulous few’ is an impressive track record.

The economy has quickly recovered from demonetisation and now remonetisation is contributing substantially to economic growth. On the infrastructure front, road and power sectors can boast of impressive gains. GST is going to be a reality.  Real Estate Regulation Act (RERA) is a major reform, which will have far-reaching benign economic consequences. While appreciating these achievements, we should also be concerned about the lapses. It is important to note that private investment is yet to pick up and the banking system is reeling under the heavy burden of stressed assets. Even though the government can claim that the high NPA is a legacy issue, the reality is that it is chocking growth in the economy. The recent ordinance amending the Banking Regulation Act empowering the RBI is, of course, a bold initiate to address the NPA problem.

A major negative in the Modi Government’s report card is that it has nothing to show on the employment front. The ‘Make in India’ initiative and job generation have miles to go. The present global environment is favourable. Global trade is picking up. In India, interest rates are trending down and investment can be expected to pick up soon. If Rain Gods bless the country this year too, the Modi Government will be marching into its final year in office stronger than any other Central Governments in a long time.