Growth may pick up, but concerns remain

Growth may pick up, but concerns remain


  1.  C. Rangarajan, former RBI Governor, discussed the issues relate to growth.

Important facts:

2. Concerns

Agriculture sector:

  • The monsoon has been somewhat below expectations.
  • There were 11 meteorological divisions (of a total of 36) which were deficient.
  • The area sown has come down.
  •  Rice-producing Bihar, for instance, has been severely affected.
  • There is no consensus on the future behaviour of the monsoon.
  •  Agricultural growth may at best be equal to what it was last year — 3.4%.

Service sector:

  • The services sector may perform better because public expenditure will be maintained at a high level.
  • According to the data of Index of Industrial Production (IIP) for the first quarter, there is substantial improvement over the corresponding period of the previous year.
  • The correlation between the IIP and national income data on manufacturing is poor.
  • The problems of the goods and services tax (GST) may have been largely overcome, but it is still a work in progress.
  • A pick-up in the growth rate in the manufacturing sector is likely.
  • Looking at the overall GDP, after several quarters of low growth, there was a strong pick-up in the last quarter of 2017-18.
  • If this momentum is maintained, the growth rate (2018-19) will certainly be above 7%. How much higher above 7% will depend on a number of factors.
  •  International financial institutions have forecast a growth rate of 7.3%.
  • The Reserve Bank of India (RBI) expects it to be 7.4%.

Trade war:

  • Trade wars have already started and can get worse.
  • The U.S. has raised duties on several products such as steel and aluminium, and on certain products imported from China.
  •  In turn, China has retaliated.
  •  India has also been caught in this exchange.
  • Besides these, there are country-specific sanctions such as those against Iran, which have a direct impact on crude oil output and prices.
  •  India benefited from the fall in crude prices earlier but this position has reversed.
  • As a net importer, India’s balance of payments can take a beating if crude prices rise again.
  •  India’s current account deficit was as low as 0.6% of GDP in 2016-17.
  • It rose to 1.9% of GDP in 2017-18, mainly because of crude price rise.
  •  India’s trade deficit has always remained high.
  •  In 2016-17, the merchandise trade deficit was 4.8% and rose to 6% of GDP the next year.
  • The fall in crude oil prices had also affected our export growth earlier. In 2017-18, India’s export growth rate was 9.78%. There is an inescapable need to raise our export growth rate.

NPA issue:

  • The banking system continues to be a source of concern. The RBI’s latest report on financial stability shows that the gross non-performing asset (NPA) ratio of scheduled commercial banks rose to 11.6% (March 2018).
  • The high NPA level has a dampening effect on the provision of new credit.
  • Credit to the industrial sector has slowed down considerably.

Impact on the fisc

  • The third concern relates to the fiscal position.
  • There are two aspects of the fisc which need to be kept under watch.
  1. One relates to GST. It is estimated that GST revenues are currently running behind budgetary projections.
  2. The second concern relates to the impact of the proposed minimum support prices (MSPs) for various agricultural commodities.
  3. The MSPs have been raised sharply in the case of some commodities. Except in the case of rice and wheat (where there is unlimited procurement at MSPs), there is no indication of how the MSPs will be implemented in relation to other commodities.
  4.  If market prices fall below MSPs, there are only two ways in which farmers can be assured of the minimum price.
  • One is the M.P. model where the State pays the difference between market price and MSP.
  • The other alternative is for the government to procure excess production over normal production so that market prices rise.

5. Suggestions:

  • Need to create more jobs and reduce poverty.
  • Raising export growth which has shown severe swings in recent years.
  • Need to ensure that the rupee does not appreciate in real terms. With a rising trade deficit and some outflow of capital, the rupee has depreciated.
  • The RBI should act only to ensure that the adjustment is smooth and there are no violent fluctuations.
  • Need to make  exports  competitive.
  • Improved efficiency in production and better infrastructure are equally important.
  • Maintenance of domestic stability also plays a key role.
  • Over the medium term, we need to search for an alternative fuel.
  • Reviving the banking system. Recapitalisation of banks has become an urgent necessity.
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