This is my first column for 2015. Let me begin by wishing my readers a very happy 2015. Sarah Ban Breathnach has said, “New Year's Day. A fresh start. A new chapter in life waiting to be written. New questions to be asked, embraced, and loved. Only dreams give birth to change.” and yet Winston Churchil has cautioned us that, “It is always wise to look ahead, but difficult to look further than you can see.”.
The year that went by contributed to some important turnarounds.
First, we have a strong, stable and credible government with a decisive leader. The era of fractured coalition politics is hopefully behind us for some time. The parliamentary majority in the Lok Sabha is decisive for the ruling party. In the Rajya Sabha the ruling party does not have a majority and forging bipartisan support will remain a challenge. It will test the skills of the ruling party in the months ahead. Even while the spectacular victories in Maharashtra and Haryana following the general election of 2014 was a reiteration of the pro-Modi sentiment, the recent victory in Jharkhand and decisive improvement in Jammu & Kashmir mark a continuation of the same trend albeit according to some in muted form. The changed composition of the Electoral College will improve BJP’s strength in upper house in 2016 with continuing improvements.
Second, the economic decline looks to have bottomed out. We have hopefully seen an end of the prolonged period of policy paralysis, sub-5 percent growth, unsustainable Current Account Deficit, raging inflation, rising subsidy bills and little or no credible action aimed at macro-economic stability or structural reforms. This fiscal year will end with growth rate somewhere between 5.4-5.9 percent, moderation of inflation, a manageable current account, a modest revival of investor confidence. Interest rates would come down this week or by the first week of February. The recent ingredients of structural reforms includes deregulation of diesel prices, replacing cooking gas subsidy with direct transfers, reforming coal sector and allowing private sector in it, Pradhan Mantri Jan Dhan Yojna, Swachha Bharat Abhiyan and labour reforms.
Third, looking at the external factors, the world in general presents a mixed picture. Japanese economy will struggle to crawl out of recession even under the renewed leadership of Abe. The slowdown in Chinese economy will persist for a while with declining competitiveness in labour intensive manufacturing. The American economy has shown a sharp upward turn with expectations of increase in interest rates which may encourage outward capital flows with pressure on our exchange rate and current account deficit. The European economy would remain in doldrums. The growing geo political tension between Russia and the West could create multiple dynamics of its own.
Fourth, the altered global energy scenario with medium term prognosis of soft oil prices has huge implications for India. The current downward trend in petroleum and oil prices would benefit fiscal management particularly subsidy flow but make renewable energy less cost competitive. A robust recovery of our exports, given global uncertainties, could remain problematic. This could impact the current account deficit. However, on the whole, the external environment in the short term looks advantageous for us. The subdued inflation behavior should be used as an opportunity to rationalize cross subsidies and pursue many pending reforms.
So what are the challenges which we face? And what could be the most beneficial outcome?
First, combining rapid economic growth with social cohesiveness will remain problematic. Societal evolution in accepting the consequences of rapid growth at best presents a mixed picture. Preserving traditional values, cultural identity, during periods of rapid urbanization and migration poses policy choices on which there are no easy answers.
Second, rapid economic growth cannot be taken for granted. Expectations both form the Prime Minister and the Budget in altering the growth trajectory remain high, almost unrealistic. Policies and procedures when altered have a gestation period. The misalignment between expectations and ground level changes in the short run can create uncertainties. The opposition would hope for political backlash. It is important to persevere and stay on the course.
Third, creating gainful employment both in manufacturing and services will need changes in regulatory framework beyond administrative actions. Some recent measures initiated in earnest to fix time limits on grant of approvals, simplifying the number of approvals needed, resolving contractual disputes, simplifying registration procedures can make a difference on the Ease of doing business. Changes in labour laws would need to go beyond encouraging states to adopt the best practices of some states like Rajasthan and Madhya Pradesh. Legislative action sooner or later will be inevitable. Reports that large foreign investments from relocation of Japanese investment away from China are still in a wait and watch mode for India suggest need for more decisive action.
Fourth, improving health and education outcomes has received priority focus. Nonetheless, harmonising skill inculcation programmes with emerging demands needs coordinated action between centre and states, the corporate sector and more robust forms of public private partnership.
Fifth, managing parliament, particularly the Rajya Sabha could remain problematic. Government has options by the way of ordinance, its promulgations and Joint Sessions. These are no substitutes for persevering with forging bipartisan support to enact key legislations. Given recent setback in State Elections the opposition may be subdued facilitating greater cooperation during the year.
Sixth, internal security presents a complex challenge. The recent ethnic killings in Assam, challenge of terrorism aided and abated from across the border and the specter of Maoist insurgency in several states requires a robust response. The conduct of peaceful elections in Jammu and Kashmir has many positives.
Finally, harnessing the improved external environment to India’s advantage. The investor appetite in United States Japan and Australia has been rekindled. Translating expectations and commitments into tangible actions may require re-doubling our efforts. Moving foreign policy to foreign economic policy must go beyond rhetoric. Harnessing the enthusiasm of Indian diaspora can be a decisive advantage.
The New Year comes with the renewed hopes and expectations. The prime minister was right when he recently said that the “World is ready for India but is India ready for the world?”. We must prove that we are and that there is credible action to address the key challenges.
It is well said by Joyce Meyer that “We don’t grow when things are easy; we grow when we face challenges.”