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Indian economy on the eve of election results

, May 10, 2014, 2 Comments

Indian Economy-MarketExpressWe are approaching May 16th – the day when the 2014 general elections results will be declared. We have received the good news that the Indian Economy has become the third largest in the world in PPP terms displacing Japan into fourth place. This is no mean achievement and one that indicates that our economy seems to be performing well.

Economic growth rates during the 10 years of UPA rule has been pretty impressive (7.5 per cent per annum) and the best for any ten year period in Indian economic history. Much is being made of the fact that economic growth has been less impressive during the UPA II period as compared to the UPA I period. But even today growth rates are pretty good compared to international standards and hovers around the 5 per cent level.

The expectation that we will return to growth rates of 8 per cent or more, is mere wishful thinking and is not going to be achieved during any foreseeable future. The potential growth rate of the Indian Economy cannot be considered to be much above 6 per cent. As such we should be pretty comfortable with the growth rates we are having at present.

We have witnessed employment growth rate of 1.6 percent per annum during the decade 1999-00 to 2009-10 which is quite impressive and comparable to the rate of growth of population during the same period Thus employment generation initiatives must be leading to a good supply demand balance on the labour front leading to a situation which is conducive to tackling unemployment rates

Poverty rates have shown a substantial decline during the last decade and the UPA government has brought 14 crore people above the poverty line. The rate of poverty decline has tripled during the last decade as compared to the previous decade.

Food grain production increased from 213 million tonnes to 263 million tonnes during the last decade and installed power capacity went up from 112700 MW to 234600 MW. Number of mobile subscribers increased from 3.36 crore to 95 crore during the same period and telephone density in rural areas increased 26 times.

There was slippage on the Current Account Deficit (CAD) front during the tenure of UPA II. But this has been set right during the last year through measures such as introducing control over gold imports. Import of gold had registered a fast galloping trend and was a prime factor which led to the ballooning of CAD. Thus curbs on gold imports became inevitable and the measures introduced in this regard turned out to be justified.

The Finance Minister had given an undertaking regarding keeping the fiscal deficit within reasonable limits and he adhered to these limits while presenting the interim budget for the current year. There is a possibility that fiscal year 2013-14 will close with a fiscal deficit of 4.5 per cent of GDP which is even better than original projections.

A major failing of the outgoing government has been on the inflation front. Efforts of the RBI to control price rise by raising interest rates have not borne fruit. Efforts to contain inflation cannot be successful merely by introducing monetary restrictions. These efforts should be supplemented by fiscal measures such as to bring down the fiscal deficit to about 3 per cent of GDP.

Supply constraints are not the prime factor driving inflation in India today. Inflation is primarily a demand driven phenomenon and improvement in incomes of the public particularly those living in rural areas have been a contributory factor. In recent years, fast economic growth, reduced poverty rates, and improvement in rural wages as a result of employment generating programmes has put enormous purchasing power in the hands of the public and this is resulting in a demand and incomes driven inflation in the country.

The measures taken by the government in tackling fuel subsidies also deserve special mention. Pricing of petrol has been decontrolled and price of this commodity moves in tune with international prices. Price of diesel was being increased by about 50 paise per litre per month. If in addition to this incremental monthly price increase a quantum increase of about Rs 5/L was brought about (as recommended by Kirit Parikh Committee) the ruling diesel price today would have been close to international prices and the UPA government would have been in a position to decontrol diesel prices which would have stood out as a major achievement of the government. This is an opportunity missed.

Important tasks for the next government which takes over will include introduction of DTC and GST, diesel decontrol and providing a fresh momentum for implementing of infrastructure projects. Needless to say success achieved in controlling fiscal deficit and CAD should not be squandered away and things should be improved further by reducing fiscal deficit even below current levels. Reducing fiscal deficit will be conducive to bringing about price stability also.

The stock market has gained a fresh momentum resulting from FII inflows driven by the success achieved in controlling the fiscal deficit and CAD. Expectations from a new government have also brought cheer to the markets. Expectations of having a stable government are mis-conceived. The government that takes over after the elections will be a coalition government which will, in all probability, be less stable than the outgoing one. But, whichever government comes to power after the elections, can keep the stock market upbeat if it adopts prudent economic management policies.

  • Keijo Varis

    Hopefully these elections and it`s result does not divide India and it`s people too much! If that happens, what kind of effects it will have to India`s economy and future?

    Keijo Varis, Dr (economics and business)

  • Milind Deora

    Seems like a congress fellow