Agreeing to disagree

The ‘green shoots’ in the recent economic data have been weak and straggly, casting doubts on the sustainability of the recent economic upturn. It is therefore heartening that both the Reserve Bank of India,in its latest annual report, and the Finance Secretary, in a recent address to industry, see enough evidence of an upturn to predict an acceleration in economic growth this fiscal (2014-15). The Finance Ministry is marginally more optimistic, predicting a growth of 5.8 per cent, while the RBI is sticking to a more cautious 5.5 per cent. But irrespective of which forecast is right, there is no doubting this is a significant improvement over the anaemic 4.7 per cent and 4.5 per cent growth rates of the last two years.

The expected drivers of this revival suggest it could be durable. While last year’s economic growth was fuelled mainly by agriculture, this year’s is expected to be powered by sectors such as mining, construction, manufacturing and services. Not only do these sectors make up over half the GDP (as opposed to the farm sector’s 15 per cent contribution), they have greater potential to expand incomes, create new jobs and prop up consumer confidence. Both the RBI and the Centre also exude confidence that the impact of this year’s whimsical monsoon on agricultural output will be limited, with the rainfall deficit already shrinking to 18 per cent by mid-August, compared to 43 per cent a month ago. Most importantly, the Central bank and the Centre now seem on the same page about the need for fiscal consolidation, with Arvind Mayaram reiterating a phase-out of diesel subsidies.

But significant differences persist when it comes to prescriptions to sustain the growth momentum. While the Finance Secretary has expressed a direct hope that the RBI will take cues from inflation to begin easing rates, the Central bank has lobbed the ball right back. Highlighting that higher capital spending is what is needed to sustain recovery, the RBI has underscored the need to remove investment bottlenecks and improve labour productivity. It has also made very specific recommendations on rethinking the contractual terms for infrastructure projects in order to resurrect the much-maligned public-private-partnership model. What the RBI is not saying but strongly hinting at is that it sees limited room to ease up on interest rates. Even if inflation moderates, it fears the risk of a capital exodus resulting from US interest rate hikes in mid-2015. Such external risks are hard to predict but also impossible to ignore for a Central bank; meanwhile, it is up to the Modi government to implement the necessary reforms to revive investment and provide a real fillip to the economy.

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