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Policy hurdles need to be tackled effectively

ADB projects moderate growth rates for India

By S. Sethuraman

 

The Asian Development Bank (ADB) sees only a “moderate pickup” in India’s growth performance in fiscal 2013, edging upto 7 per cent, but this is on assumption of inflation lowering for monetary policy to ease, fiscal deficit being held at budgeted 5.1 per cent of GDP, and on overcoming structural and regulatory constraints for investment revival.

A return to India’s strong performance of recent years hinges on moving the reform agenda forward, says the Asian Development Outlook Report of ADB. It projects growth to improve somewhat to 7.5 per cent in Fiscal 2014.

“An expected easing in monetary policy after a long period of persistent inflation and rate hikes might help stimulate investment over the coming year, but its impact is likely to be limited until obstacles like land purchase and environmental regulations, which are currently deterring both domestic and foreign investors, are addressed,” said Changyong Rhee, ADB’s Chief Economist.

The dip in inflation is expected to continue on the expectation of normal monsoons and more stable global commodity prices but WPI average of 7 per cent for the current fiscal year, as estimated by ADB, would still be above RBI’s comfort zone for a steady reduction in policy lending rates.

Monetary easing is keenly looked for not only by the corporates but even more by the Finance Ministry which favours an early start to rate cutting by RBI to help improve the sluggish investment climate. Much would depend on how RBI looks at the rate of inflation in March, which should be available on April 14, and also other post-budget developments besides its own assessment of the fiscal outlook and global commodity price trends.

There are advocates of caution who contend inflation is still too high for comfort and has not been decisively brought down. Oil prices remain high and it does not seem feasible for Government to effect a pass-through of diesel prices, in the main, in the absence of a political consensus. Amid all uncertainties, borrowers hope that RBI would make a beginning with monetary easing with a 0.25 percentage point cut in repo rate when it announces the Monetary and Credit Policy for 2012-13 on April 17.

ADB says the longer-term outlook for consumer prices would depend on structural reforms to improve production and distribution of food, as India’s consumption patterns and incomes change.

GDP growth slowed markedly in FY2011 as industrial and investment activity slumped and the current account deficit widened, the report notes.. A combination of tight monetary policy to counter persistently high inflation, strained global economic conditions, larger subsidies that pushed up the budget deficit, and lack of political consensus on resolving the policy impediments to growth were factors in the downdraft.

Boosting investment and growth to match the strong performance of recent years will hinge on reaching agreement on measures to deal with long-standing and challenging policy issues, ADB says and attributes the sharp deceleration in investment in 2011 to slump in the global economy and trade, tighter monetary policy and higher nominal interest rates (to combat persistent high inflation) and, a larger than expected budget deficit in FY2011. Added to these was “a growing sense of a national policy paralysis (due to political parties’ inability to agree on certain issues, including structural measures).

On economic prospects, the report says Investment is likely to remain sluggish for some time because new project announcements continued to decline during the third quarter of FY2011-12. A sharp increase in the number of stalled projects, reflecting a host of structural bottlenecks related to fuel and power shortages, delays in environmental clearance, and other policy hurdles.

Business sentiment has deteriorated on various indicators in the RBI’s Business Expectation Index, and in similar surveys conducted by chambers of commerce. On balance, these business indicators suggest that investment will remain subdued in FY2013. The impact of monetary easing and lower interest rates, improving external conditions, and some progress on stalled reforms and removal of the bottlenecks should lead to a revival of industrial activity starting in the second half of FY2013 and into the next year. But their effect is likely to be limited until the government eliminates the policy issues.

Recent steps, such as increasing the pace of road building as well as fast-track clearances for coal and power projects, are encouraging, though many other issues remain in the wings.

A normal monsoon would help agriculture expand at its trend rate (around 3%), in turn bolstering rural incomes and private consumption. The services sector, which has so far been resilient to the domestic slowdown, is expected to maintain its solid growth, supported by robust trends in private consumption spending and in urbanization. The global slowdown is, however, likely to trim growth in software and business services.

Reporting on rising inequality in the region, the ADB report says this casts “a shadow over Asia’s ongoing economic success. Poverty has been reduced across the board with number of people living below the $1.25 a day poverty falling by 430 million between 2005 and 2010 – and rising numbers of Asians are enjoying a middle class lifestyle.

While the region flourishes, it adds, the depressing reality is the march to prosperity has also seen a startling rise in inequality. New data show that worrying inequality has risen in China, India, and Indonesia – the three most populous nations that have driven the region’s rapid growth. With economists realizing that inequality has been fuelled by the same factors that lead to growth, the ‘Asian Century’ may well turn into the ‘Asian Paradox’. (IPA Service)

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