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Watering the sign of growth and renewal (Relevant for GS Mains Paper III)

Factors affecting growth of Economy:

A) Supply side perspectives:
Looking at the problem from the supply side, the one segment that will do better is agriculture.

This is based purely on the better performance of the monsoon. In the short run, rainfall is an important factor influencing agricultural production.Based on a study of the impact of rainfall on agricultural production, this should lead to an increase in value added in agricultural and allied activities by 2.7 per cent.

B) Demand side perspectives:
The demand side, there are four elements that we need to examine:

1. Private consumption expenditure: As far as private consumption expenditure is concerned, a major factor contributing to a push is the implementation of the recommendations of the Seventh Pay Commission.

2. Government expenditure particularly on investment: Government’s salary and pension expenditures are expected to rise by 20 per cent.

As those recommendations were made effective only from August 2016, the impact on the production of consumption goods will be seen only in the second half. There is evidence of some sectors like two-wheelers growing fast. The impact of the good monsoon on rural demand may also show up in the second half.

3. Private investment particularly corporate investment: The third important segment is corporate investment. In the last several years corporate investment has been roughly one-third of the total Gross Fixed Capital Formation. Therefore it is critical to watch its behaviour.

With the slowdown in new projects undertaken in recent years, it is unlikely that investment expenditures by the corporate sector in 2016-17 can be higher than in 2015-16. The study by RBI staff indicates that substantial investment in the projects initiated in 2016-17 will be required to equal previous year’s total investment expenditures. The total cost of projects initiated with institutional assistance in 2015-16 was Rs.954 billion, and Rs.878 billion in 2014-15. All this is a far cry from the figure of Rs.2,754 billion in 2006-07.

4. External demand: The external demand is largely a reflection of the world economy which shows a sluggish recovery. All forecasts indicate a slowing down in the world growth rate in 2016.

The expectation is a slight improvement in 2017. World trade is also slowing. Exports of India started declining in 2015-16. For the year as a whole, the decline was 15.5 per cent. Much of this was due to the fall in the value of oil exports. However, some improvement in the current year is seen.

Signs of Growth and renewal
Thus, the positive signs in the economy are:
1. An improved agricultural performance and a pick-up in rural demand
2. Some increase in private consumption expenditure primarily due to the implementation of the Seventh Pay Commission recommendations and an enhanced capital expenditure by government.

Negative indicators: 
1. Continued stagnation in corporate investment and
2. Poor external environment.

Economic Growth
The growth rate of GVA (gross value added) at basic prices in 2015-16 was 7.2 per cent. This year it may be slightly better at 7.6 per cent mainly because of improved agricultural performance. This estimate of the growth rate will undergo a downward revision if the disruptions caused by demonetisation persist for a long time.

Inflation
The Indian economy has acquired a certain amount of stability. Prices are under control. Both CPI (consumer price index) and WPI (wholesale price index) inflation are below 5 per cent. Improved agricultural performance may further moderate food prices.

Fiscal Position
The fiscal picture has been under control, even though as of now the fiscal deficit is running high. The current account deficit remains subdued. For the current year, it may be lower than last year’s level of 1.1 per cent of GDP. All these are favourable factors for sustained economic growth. The banking system is however under stress.

Reforms Undertaken
On the reforms front, there has been some improvement. Initially, there was the amendment to the Insurance Act to facilitate larger foreign investment. The Bankruptcy Act has been enacted. The real estate sector now has a regulator. Finally, the goods and services tax is becoming a reality. All of these are enabling legislations. The impact of these legislations on the economy will take some time to come. But they are moves in the right direction.

Conclusion
To maintain a high growth rate in the medium term, a kick start in investment is imperative. This is yet to happen, even though the investment sentiment is slightly better today. But more than ever, non-economic factors will play a key role determining if this sentiment will be sustained or not. Policy-makers need to be conscious of this and keep the focus on growth, and away from divisive and disruptive issues.

 



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