Two years of Narendra Modi govt: Economists want PM to speed up reforms

India may have found itself under the spotlight in the global arena, but the economists, who took stock of the National Democratic Alliance (NDA) government's performance after two years of its rule, said it needed to further speed up reforms process and take bolder initiatives to reach its full potential growth of 8-9.5%.

Using the analogy of cricket to put across his view on how the Prime Minister Narendra Modi-led government had fared in the last two years, Amit Kumar Sarkar, partner of Grant Thornton India, said the PM should be playing boundaries and not "forward defence strokes" on the economic front.

"In cricket parlance, a person like Narendra Modi is basically playing forward defence strokes when he had the potential to hit fours and sixes. This is India, we want him to score boundaries. Whenever he does attempt to score a boundary, the fielding is quite good and it not crossing the ropes," said Sarkar, who is let down by the overall administrative and legislative initiatives of the government.

It baffles him why the government was shying away from taking big decisions while it was diligently working on micro reforms like digitising registration process, Jan Dhan Yojna, Suraksha Bima Yojna and others.

"On the bigger matters (read goods and services tax, Vodafone retrospective tax issue and others), the ones where the government is saying that it is in charge, it is showing that it is (actually) not in charge," he laments.

D K Srivastava, chief economic advisor, EY India, feels India's gross domestic product (GDP) was growing below its "genuine potential" growth rate of 8-9.5%.

One of the reasons for this was that the government's growth strategy was largely based on supply side initiatives, and was less reliant on private consumption demand.

Most of the Modi government's policy efforts like Digital India, Make in India, Skill India, Start-up India and others have been focused on spurring supply side engine.

"Clearly, there is higher growth potential in the economy than what is being taken benefit of, but they have still performed satisfactorily. Most of the NDA government's initiatives are on the supply side whereas the problem is of deficient demand both globally and domestically. Normally, a growth strategy not dependent on private consumption demand turns out to be a low growth strategy," he said.

The Indian economy has grown at over 7% in the last three years even as the global economic growth has been over 3%. A recent report by research and rating company Moody's Investors Service predicts India's growth to pick up slightly to 7.5% in 2016 and 2017 compared with 7.3% in 2015.

Commendably, India's economy has shown growth despite its exports falling consistently over the last 17 months. Last month, it fell 6.74% in dollar terms to $20.51 billion from $22.05 billion in the corresponding period last year.

The drop in investment spending, savings and industrial productions may also not be very heartening for the country, whose private investment has also refused to pick up.

Official data showed that manufacturing, which has the maximum weightage in the overall Index of Industrial Production (IIP), dipped 1.2% in March.

Ranen Banerjee, leader, public finance, PricewaterhouseCooper (PwC) India, said what was playing out in the manufacturing sector was inventory effect rather than demand efficiency.

"My sense is, it (drop in manufacturing) is about inventory clearance. I don't think it's a demand issue. What I understand from the sales figures of white goods, they have been brisk whereas production figures are not reflecting them. This means that either there was inventory built-up, which is being cleared," he said.

Banerjee believes manufacturing numbers could be lagging behind one cycle compared to demand pick up; "The next quarter's numbers (for manufacturing) will be very important to see how the trend is. If they are better then we should draw comfort from that".

EY's Srivastava believes sustainable industrial growth and increased capacity utilisation was very crucial for new private investment demand.

Manufacturing during the high growth phase of 2005-06 to 2007-08 had shot up to 11% even as gross capital formation during that period was 36.2%. Even though today's current account deficit (CAD) has narrowed to 1.4% of the GDP during the April to December period of 2015 from 1.7% of the GDP in the same period in 2014, it is still above the 1.2% of the GDP that was registered during India's recent economic boom years.

The hardening of consumer price index (CPI) inflation to 5.39% in April compared with 4.83% in the month before has also caused concerns. Even the Wholesale Price Index (WPI) inflation has turned positive in the same month after 18 months of remaining in the negative zone.

Rising inflation rate and recent upturn in crude prices, which helped the Modi government to improve its economic macros, could spoil the game for it going forward.

Sarkar says easing oil prices and inflation rate had helped Finance Minister Arun Jaitley in a big way to achieve the fiscal deficit target of 3.9 of the GDP rather than any fiscal discipline.

Now, everyone has fixed his gaze on three things that will be crucial in the Modi government's performance going forward – the crude oil prices, monsoon and the GST.

Since the crude price hit the 13-year low in February, when it slipped below $30 per barrel, it has rebounded in the last few months to over $40 per barrel. This would take away a big advantage that NDA government had.

"What is the government's insurance against the increase in crude prices? The world had a very mild winter this year. Weather forecast is that in the coming year, a normal to a slightly colder than average winter would be experienced. Which means (crude) prices will start going up," said Sarkar.

A lot of the gains that would be lost on account of the upward movement of oil prices could offset by gains from a good monsoon, which is likely to suppressed rural demand. Agriculture sector growth that had at around 5% in the heydays had fallen to below 1% due to two straight years of deficient monsoon. Srivastava expects sufficient rains during the current year to add half a percent to the GDP.

Banerjee expects good monsoon to improve factory capacity as India Inc in anticipation of robust rural demand may increase their inventory.

On GST front, Modi has disappointed everyone as an opaque or complex indirect tax structure has not done well for either the economy or foreign investments.

Finally, Srivastava feels that Modi has an "historical opportunity of employing a growing working age population" and propping up the per capita income of the country. He says a 7% growth will not allow India to reap its "demographic dividend".

"If we remain satisfied by the 7%-plus growth rate then enough employment cannot be generated, and we will miss a major historical opportunity of employing a growing working age population," he said.