India cannot afford 7.5% to be the new normal rate of growth
At 7.5%, India’s growth is better than many EU nations; but with timely reforms it can be pushed above 9%.editorials Updated: Dec 20, 2015 21:53 IST
There is no gainsaying the fact that by most markers India remains one of the brightest spots in the world economy. When most of Europe is struggling to claw out of a prolonged slide, India is set to expand at about 7.5%, outpacing neighbouring China. However, it would be foolhardy to ignore the red flags that remain scattered. The Mid-Year Economic Analysis 2015-16, which was tabled in Parliament on Friday, makes these points amply clear. At 7.5%, India’s gross domestic product growth for this year is one percentage point scale down from the earlier estimates. So, what has changed between February, when the government had forecast a growth rate of 8.1-8.5%, and now?
The country’s first back-to-back drought in three decades has crimped rural demand for goods. When rain-dependent farm output is robust, rural income and spending go up, creating demand for manufactured goods, which in turn helps the general economy. On the export front, drying shipment orders have hurt India’s traders. Merchandise exports have now plunged for 12 straight months, underlining the gravity of prevailing precarious conditions in the world market. Declining exports seem to be predominantly determined by a decline in world demand. Regardless of the causes, the effect has been a drag on growth. According to the finance ministry’s analysis, this drag has been about 1 percentage point even relative to last year.
That said, there are a few silver linings. In signs that people are spending more on goods such as cars, the report has pointed out that private consumption has been an unambiguous bright spot in the economy. The government would be hoping that this spending trend will accentuate in the coming months to fully use up the under-utilised capacities and eventually prompt companies to invest more. India’s ability to push the growth curve back to levels above 9% will critically depend on the speed of reforms and the government’s ability to implement promised changes to ease rules of doing business. Finding a way out of the Parliamentary logjam to push through key legislation for tax and labour reforms is absolutely essential. Otherwise, the risk of getting stuck in the 7-7.5% growth range will only get more pronounced. India cannot afford 7.5% to be the new normal rate of growth.