A slow revival

Anybody who believed an economic revival would be occurring the moment a Narendra Modi-led Government was firmly in the saddle should temper this optimism. Achchhe din (good days) will come, but not immediately. This is the central message of the Economic Survey for 2013-14 tabled by Finance Minister Arun Jaitley in Parliament on Tuesday. GDP growth, according to it, will not revert to 7-8 per cent levels either in the ongoing or the next fiscal. A full-fledged recovery, taking growth closer to the average 8.3 per cent per annum during 2004-05 and 2011-12, isn’t likely before 2016-17. While the economy may grow between 5.4 and 5.9 per cent this year — better than the average 4.6 per cent in 2012-13 and 2014-15 — the process of revival is going to be gradual at best.

One doesn’t know whether the Survey’s prognosis is part of a deliberate strategy of tempering expectations — a contrast to the all-round optimism projected through Modi’s election campaign and the market euphoria that accompanied his elevation as Prime Minister. Getting real and being candid is, in any case, a sensible approach for a Government that has full five years to deliver on its achchhe din promise. The Survey is right in noting that the Centre’s finances — unlike in 2007-08 — do not permit any fiscal stimulus for kick-starting economic activity. There is similarly little scope for monetary easing in a scenario of persistent inflation; the prospect of a poor monsoon makes this even more difficult. Having neither of the conventional fiscal nor monetary tools in its armoury will make the task of growth revival hugely challenging for this Government. The only policy options before it, then, are fiscal consolidation and removal of the various structural constraints that add to the cost of doing business in India.

The Survey is spot on in both its diagnosis of the economy’s problems and the broad ‘supply-side’ solutions to address these, which will be the key to reviving investment and growth. Thursday’s Budget will provide some indication of the Government’s commitment to put its own finances in order (which also creates fiscal space for public investment in infrastructure and other productive avenues) and to create a legal and regulatory environment that is conducive for investment. Limited flexibility on the fiscal and monetary policy fronts need not be intractable constraints if investors perceive the Government is serious about taking quick decisions on project clearances, rationalising tax administration, reforming outdated labour laws, changing the way agricultural produce is marketed in the country, and phasing out ill-directed subsidies. Credible policies and decisiveness on the Government’s part are the first steps towards restoring business sentiment. From there on, it is only a short step to bring back growth.

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