Macros look better, but demand stagnant

In its appraisal of the one year rule of the Narendra Modi government, CRISIL is all praise for the government for addressing policy paralysis and enhancing ease of doing business, but opines that, “There is no monetary and fiscal bazooka at hand either. In other words, there is little that can be done to engineer a quick revival in demand.”

Visakhapatnam: When the Narendra Modi-led National Democratic Alliance (NDA) stormed to power with a resounding majority last year, it inherited a frail economy. Twelve months on, the macros are looking better, growth is inching up, inflation has tempered and the current account deficit (CAD) is in the safe zone. This was revealed by a study done by CRISIL Research and CRISIL Rating, which was released on Tuesday.

However, the recent rise in crude oil prices, possibility of a weak monsoon and rising rural distress, besides the parliamentary logjam over some critical pieces of legislation, such as land acquisition and GST, are rationalising expectations of a major growth on the back of a revival in demand. The Modi government is addressing the policy paralysis by energising the bureaucracy, fast-tracking the decision-making process and enhancing the ease of doing business.

“This will create enablers for growth, but cannot push demand up in the short term. There is no monetary and fiscal bazooka at hand either. In other words, there is little that can be done to engineer a quick revival in demand,” the study points out. While the GDP growth increased to 7.4 per cent from 6.9 per cent in 2013-14, inflation slid to six per cent from 9.5 per cent. CRISIL expects the GDP growth to grind up to 7.9 per cent, inflation to retreat to 5.8 per cent and the CAD at one per cent of GDP by the end of the current fiscal.

Some of the major financial market developments during this period include increase in FDI in insurance sector to 49 per cent from 26 per cent, 120 million accounts opened under the Jan Dhan Yojana, creation of payment banks for financial inclusion, financial code to revamp regulation of financial markets and strengthening the stressed asset resolution and recovery mechanism.

What does now lie ahead for India? CRISIL believes that at the current macro-economic pace, it could take 12 to 18 months before headroom in capacity utilisation in the manufacturing sector gets closed and private investment cycle is set in motion. “This is because, despite underlying optimism, companies are chary of putting money where their mouth is.

They are seeking affirmations that growth triggers are well pulled and will stay so,” it says. On the export front also, things do not look so bright. The global economy is expected to navigate a mild and uneven recovery path in 2015, while muted world trade growth will restrict exports. The World Trade Organisation (WTO) expects the world trade to grow at 3.3 per cent in 2015 and 2016, as compared to five per cent since 1990.

By Amit Mitra