What next for the Economy?

Prasanth Aby Thomas
Published: December 2014

The number of economic challenges ahead of the new government are daunting, but it is crucial that short term and long term initiatives are put in place to revive the India growth story.

modi-1After a lot of noise, anticipation and chaotic forecasts, the Narendra Modi led Bharatiya Janatha Party has come to power with an overwhelming majority, displaying once again that elections are probably the biggest leveller in our country. Due to the enormity of the change, the dust still seems reluctant to settle at the Centre, but that does not disguise the ugly face of the economic problems that lie ahead for the country.

The Prime Minister himself made this clear a few weeks back, when he said that the country had to tighten its financial belt before it could see any clear signs of growth.
“It’s necessary to take steps to improve financial discipline and improve the economic health of the country,” he said. “I know my popularity might go down due to these hard decisions, people might be annoyed with me, but they will appreciate it later.”

This warning was quickly followed by a massive hike in rail fares, both passenger and cargo, and at the time this article is being written, analysts expect the annual budget to contain strong measures that could ensure less populist spending and more austerity measures. According to Bloomberg reports, India’s subsidy bill jumped five times over the past ten years to 2.6 trillion rupees by the financial year ending March 31. These subsidies included food, fuel and fertilizer in a country where about two-thirds of 1.2 billion people live on less than about Rs. 120 per day. The Finance Minister, Arun Jaitley had made this clear as well when he said that there was no more room for thoughtless populism if Asia’s third largest economy was serious about pulling out of its slump.

“If you indulge in mindless populism you burden the exchequer,” Jaitley said at a conference in New Delhi. “You convert yourself into a high taxation society so that you can indulge in populism. It does not work.”

The immediate challenges ahead of the government are controlling the inflation rate, easing supply side constraints including those related to energy, commodities, transportation and storage. High prices have for a long time been the major factor hurting people and the economy as a whole for the past few years. According to reports, the country’s retail food inflation for the month of May stood at 9.04 percent. Sky-high inflation levels have restricted the Reserve Bank of India from lowering its interest rates, much to the worry of industries.

modiBut unfortunately concerns of inflation are not limited solely to government policies or, for that matter, actions that the government might undertake when it announces the budget. A major fear is that the weak monsoons this year would hurt agricultural produce, forcing the prices to remain higher.

The government will also be keen on improving the business environment in the country. Recent controversies that included taxation issues with companies such as Vodafone have left many of the businesses worried about the conditions in which they need to function. Experts feel that although corporates feel more welcome with Narendra Modi at the helm, the government still has a task at hand to ease concerns and bring in investment. Tackling these issues would set the stage for initiatives that will have to be taken in the longer term. There is no doubt that India needs to strengthen its workforce, upgrading skills and encouraging an aptitude for innovation. Our educational system is still not at comparable levels with developed economies and unless we rectify this we cannot make sure that our best minds are well trained and retained for the good of the country.

Infrastructure, which will probably require trillions of rupees in investment, is yet another matter of concern. Our local transport systems are nowhere near required safety levels. Train accidents are increasing day by day, the number train accident deaths in the recent past is staggering.

Our road systems are dangerous, regardless of whether it is due to traffic management or maintenance of roads. Public transport systems within cities and towns is one area where India even now has not managed to reach a stable level. Our buses and trains are totally unreliable in following schedule. Due to this, more and more people rely on private transport system, increasing the number of cars and two wheelers on our roads, clogging up the entire system and increasing pollution.

As the Mayor of Bogota, Columbia, Gustavo Petro once said, “A developed country is not a place where the poor have cars. It’s where the rich use public transportation.” We can clearly see that people would prefer to use public transportation rather than drive, for daily commutation needs, provided the system can guarantee they reach their destination on time, without hassles.

The current government has the best chance of reviving India’s lagging economy, especially since it does not have to bother about the pressures and complications of a coalition administration. Experts have also opined that Narendra Modi, having proven his mettle in Gujarat, is the right person at the moment to bring in the much needed overhaul. But concerns do remain due to the extent of challenges ahead, and due to the fact that India is such a varied country with complicated social systems that are often resistant to dramatic changes.

However, such changes are inevitable at this stage, and is the only way we can hope to provide the Indian growth story its much needed acceleration.