India on the cusp of great momentum

In 1990, the ‘Apara Chanakya’ of the 20th century, P V Narasimha Rao, despite leading a minority government, steered the country on a revolutionary path of reforms, with the able support of Dr Manmohan Singh. The real fruits of these economic reforms were later reaped after his regime, during 1996-98, albeit with a pause in the pace of reforms by the successor government during the period from 1995 to 1997.

With the NDA government in place again, India saw rapid development from 2001 to 2004. Later, in the UPA-I era, the country again saw the real impact of economic reforms at an unexpected speed and levels. But, with UPA–2, there was lull in the economic activity, as a severe economic crisis engulfed the world.

UPA-2 virtually became ineffective in the looks of both Indians and the world due to the prevailing conditions then, but the monetary policy persuaded by it certainly helped save the Indian economy from falling to more serious levels than it was it.

The BJP government is enjoying the fruits of effective and tight monetary policies implemented during the previous regime. Inflation looks to be coming under control as per the statistics. Modiji has given tremendous confidence to the country and the world that he is here to perform. Looks like, the god is also with him, as oil prices have tumbled and other emerging economies are not performing well as per the expectations of the world. Hence ‘Destination India’ is the new slogan catching up around the world.

Developed economies like the US and Europe are not in a position to control the world economy any more like in the past. Governments there are busy setting right their own economies. Hopes of revival of these economies anytime soon are bleak. While this is so, China has set out on its journey of building a strong economy; it has become a formidable force to reckon with. Ushering in rapid economic growth since 1990, today it has reached a stage, able to influence world’s economy and trade. However, the fastest growing economy has lately realised its weakness on the oil front. It does not have great oil reserves and its efforts to access oil reserves in South China Sea have been strongly opposed by Japan and other nations.

Faced with the scenario of high oil prices and its impact on the country’s inflation, Chinese have started building a strong strategic oil reserve – a major factor which helped oil producers to push the oil price to $ 120 and beyond. It has also entered African countries, helping them build infrastructure and is in the bargain taking oil from them. In any case, China will not give up its ‘oil search’ and may resort to tapping its shale gas reserves in its western part and try to become self-reliant. Also, more and more countries like Vietnam will be working towards finding their own Oil and Gas reserves to meet their internal demand and save import bill.

All these factors are indicating that the Gulf domination on world oil prices is coming to an end. This is a good point for India that our current account deficit and inflation can be managed well, which shall change the Country’s Economic scenario. However both Central and State Govts are losing heavily on their revenues from lower oil prices, both in Central Excise and Vat. At one point of time, China was registering 15% plus GDP growth and India was registering 8% GDP growth. Everybody thought that it would take a very little time for India to reach those levels. But things went other way round, and with China feeling the heat of high inflation, their economy too has started slowing down. Now, the gap between the China and India GDP growth seems to be narrowing.

Given the circumstances, positive vibes created by Modi is holding India’s GDP rates from falling further. But, then the real story has just begun. India needs capital to move forward; so by allowing GDP in many sectors and by diluting the government stake in PSUs, the Government of India is trying to give a fillip to the economy.

With more inflows of foreign exchange into the country, the US dollar versus Indian rupee parity will change and there is every possibility of the rupee appreciating. However, this may further inflate the current account deficit as more non oil imports will enter this country, hurting the domestic manufacturers and if the rupee appreciates, exports will take a hit.

As rightly pointed out by our Finance Minister Arun Jaitley, time has come for India to have a re-look at the past treaties with the other countries and organisations. Perhaps, some bold decisions at this stage can put India ahead of other countries in respect of development.

Time has come for India to speed up oil and gas reserves exploration and save the US dollar payments, as the saying goes “ A rupee saved is a rupee earned”. This will help shore up our forex reserves and balance of payments position, which in turn will prod rating agencies to improve our sovereign ratings. All this will see India attract more FDI at a fast clip to build our infra sector.

If the government can take some firm measures, we can hope to see emergence of strong economy in a short time. We can also see 14 to 15% nominal GDP and 8 to 9% real GDP growth very soon.

Otherwise, we shall have to either wait for a longer period or perhaps face the “crumbling” situation once again. As it is, since the entire world is not positioned well in all respects, India has got a bright chance of building a strong economy, which will help revitalise the world economy, too.

By: Raghava Baba