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The Dark Clouds And Silver Linings

If the government follows up with some much needed reforms ... we should see a spurt in the economyintroduction

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There are a few dark clouds on the economic horizon. The sluggish index of industrial production and low investment rates do not suggest a quick acceleration of the economy. The value of stalled projects reached Rs 13.22 trillion in September 2017 — the fifth consecutive quarter when the value of stalled projects has increased. Some Indian entrepreneurs still find it more attractive to invest abroad than in India. The rate of inflation is creeping up and so RBI is less likely to lower the interest rate.

The impact of demonetisation and GST on the informal sector and small and medium enterprises is yet to be assessed and not yet behind us. The informal sector is the largest employer and the pain of disruption should have been widely felt. Crude oil prices are rising in the world market and are around $60 per barrel and likely to go higher.

The employment situation continues to remain disastrous. How the young,   educated unemployed will behave in the 2019 election is anybody’s guess and remains to be seen. This may encourage the government to take populist steps that could spur inflation and hinder growth.

The Gross Value Addition (GVA) increased by 6.1 per cent in the second quarter ending September 2017, up from 5.6 per cent in the previous quarter and may look like a silver lining. However, the second quarter is usually better than the first and if we look at the second quarter of 2016-17, the growth rate is lower. Also, the quick estimates of GVA assess the GVA of the SMEs and informal sector with a multiplier of the GVA of the organised sector based on past surveys. This would not account for the particular disruption of demonetisation and GST introduction.

In India, as Pundit Nehru observed years ago, if you lose hope nothing is left. Thus, as a congenital optimist I look for some silver linings to these clouds. The Gujarat election has given the government a warning. The PM is smart and will heed the warning. I expect measures to stimulate the economy in quick succession now. The GST regime is being simplified. The emphasis on infrastructure investment is being pushed and significant step-up in expenditure could be expected. Electricity demand has gone up, resulting in higher load factors for thermal plants. This has been the outcome of strengthening of the grid so that power can now flow more freely from one region to another than in the past. The improved quality of uninterrupted power supply should help industries reduce cost and be more competitive.

If the government follows up with some much needed reforms in the land Act and labour laws, we should see a spurt in the economy. The booming stock market is an indication of market expectations as much as irrational exuberance. The benefits of DBT for the poor as it spreads and wrinkles are ironed out, should also increase optimism.

Finally, some technological development can change our energy scene. The much awaited fast breeder reactor will get on stream and that will be a sign of our atomic energy programme’s maturity. A commercial sized second generation ethanol plant based on rice straws is under construction in Punjab. This has the potential to substantially reduce our need for imported crude. The falling cost of electricity storage can give a big boost to electric vehicles which are making their entry in the Indian market. All these may brighten 2018.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Kirit S. Parikh

The author is Chairman, Integrated Research and Action for Development (IRADe)

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