One year of Modi govt | Push government spending for real, organic growth, Experts say

A year after the Narendra Modi-led NDA formed the government at the Centre, macroeconomic numbers have considerably improved, but how much credit can it take for it?

In April, retail inflation was down to 4.87% and WPI inflation hovered in negative zone at -2.65%. D K Srivastava, chief policy advisor at consulting firm EY India, said it was largely because global crude oil prices were soft for most part of last year.

"Fall in inflation can be attributed to fall in global crude oil prices, which was an extra-ordinary event, and partly because RBI (Reserve bank of India), which despite the government pressure, is not willing to cut interest rate. These two are responsible 90% for inflation dipping to the current level. The 10% role played by the government in it was its control of food item prices through supply side management that prevented seasonal uptick in supply," he said.

The EY economist also expressed concern over the way fiscal deficit had been contained at 4% of the GDP. "It has been done by reducing of expenditure relative to GDP. This is a contractionary fiscal strategy, and is not advisable when one is looking to improve growth rate of the economy," he said.

According to him, there were no tangible reasons for the higher GDP growth rate other than the revised method of computing it.
"It is difficult to say whether the improvement (of GDP growth rate) has any tangible roots, other than revision in its calculation method, there is no upswing in investment, consumer demand or reduction in inventory. Other signals are mixed. This kind of fiscal deficit control is not desirable when growth rate is slow," said Srivasta.

If all these were taken into account, he said, the government's performance cannot be taken as a huge success story. However, Srivasta feels the various initiatives taken by government could yield results in the next 2-3 years. And, he said if the government wanted to develop infrastructure and lower the high level of non-performing assets (NPAs), it needs to increase capital expenditure.
"There is no sign of that (increase in capex), not even in the Budget of the current fiscal (2015-16). It (capex) can be done only when there is considerable tax buoyancy or restructuring of expenditure," he said.

Naina Lal Kidwai, executive director of HSBC Asia Pacific, expects NPA levels to improve once infrastructure development is set in motion. "They (NPAs) are on the way down (last month it fell to 5.2% from 5.6%). Growth going up would also typically mean that NPAs would be down," she said.

Kidwai also feels government needed to spend more to kick start the economy. She believes stimulating consumer demand was very important to improve capacity utilisation, which in turn would spur investment and set in motion other economic activities for growth.
"Government needs to spend more. If you look from demand side, yes lower interest rate will put more money in the hands of people to spend. Reducing inflation and taxes would also do the same," said HSBC Asia Pacific chief.

EY's Srivastava said lower rate of current account deficit (CAD) was also largely due to decline in global oil price, which reduced the import bill. Now, crude prices climbing up again along with contracting exports is not good for mid-term growth. He said it also did not bode well for the current government's 'Make in India' programme as it could be done through import substitution rather than export promotion.

Srivastava complained that the current government's macroeconomic strategy was not very nuanced. "Macroeconomic strategy (of the government) is not clearly spelled out but its number of initiatives could see it succeed," he said.

The weakening rupee, though, may help prop up exports. Jamal Mecklai, currency expert and chief executive officer (CEO) Mecklai Financial Services said, "There is no direct correlation to the government but it (rupee) certainly was stronger after the Modi government took office. Subsequently, it weakened a bit reacting due to global events rather than to domestic developments."

On Monday, the rupee slipped a little at Rs 63.62 to the dollar. The Indian currency has weakened by 2.8% against the dollar since end-March.

India Forex Advisors said in a report, "Indian rupee has held its ground against the strong US dollar rally, which gained nearly 20% during the period. The strong performance of rupee has came under the backdrop of strong capital inflow and improvement in macroeconomic indicators. India's macroeconomic health has also improved dramatically during this period."

The Indian government has been campaigning for its 'Make In India' programme and has taken constructive steps including infrastructure investment of nearly Rs 70,000 crore to revive the economy.

"The government has attracted whooping $30 billion in last 12 months for the various projects in the economy. India's capital markets has enjoyed a dream run with Sensex gaining more than 21% and yield tumbling below 8% levels," India Forex Advisors added.