HYDERABAD: The incoming government will begin its innings with an assemblage of economic priorities. If high inflation, slow growth, worrisome fiscal deficit and Current Account Deficit marked the start of NDA’s first-term in May 2014, barring inflation, the ills ailing the economy hasn’t changed much.
We did see key reforms like the GST, though it’s yet to crank out revenue. Despite buoyancy in income tax revenue and non-tax revenue (thanks to historic proceeds from disinvestments), fiscal deficit targets were rolled over. With tax collections missing FY19 target, will the next finance minister open the spending tap to spur growth?
But that’s an option one may not have as it could further strain finances. The NDA government simply lacked the means (and will) to tax, so it instead borrowed. According to J P Morgan, combined borrowings of Central, state and public sector entities account for 8.6 per cent of GDP. Containing deficit, either by tightening the nation’s belt or by imposing new taxes and tariffs may well be the first big test of the next FM as economists advocate thrift and discourage debt.
The world’s fastest growing economy can grow above 8 per cent, but strangely is surviving in the vicinity. The incoming government thus needs to get GDP growth to speed up, spur consumption, revive private investment and create jobs.
Consumption, which accounts for over 60 per cent of GDP, remained softer over the past two years. So was industrial activity, while exports were dismal. “The BJP’s manifesto is unhelpful in judging its true priorities, but we expect job creation to be the primary economic focus of the NDA early in its new term having ostensibly dodged that bullet in 2019,” noted Jefferies India.
About 1 million people enter the workforce every month and job creation is the need of the hour. Facing flak, the NDA government withheld NSSO’s latest jobs data report, a leaked portion of which revealed that unemployment rate stood at a 45-year high of 6.1 per cent.
While the survey’s technical methodology is being contested, it’s clear that structural reforms are needed to support growth and job creation for next decade. Fixed investments are stuck at about 30 per cent of GDP in last four years and unless the investment cycle re-starts, job creation will stay a challenge.
Bank credit is improving, but is insipid, while the crisis at NBFCs, which account for a third of all new loans, is likely to get worse if desirable measures aren’t rolled out soon.
Trade deficit remains on the edge as exports growth leaves much to be desired, while imports continue to outgrow exports. Prime Minister Narendra Modi’s ‘good luck’ lowered fuel prices in FY16 allowing the Centre to live off ‘an oil bonanza’, but that lucky charm is on the turn, with Brent crude trading over $70 from a low of $27 per barrel in 2016. If oil is on the boil, CAD will become troublesome yet again.