14 APRIL 2016
Green shoots? Maybe, but they need watering
Are there green shoots in the economy? Do Achche Din lie ahead of us? Given the number of times such false hopes have been raised over the past couple of years, it is much too hasty to conclude that the recent thread of positive economic data puts the country firmly on the path of accelerated economic growth. While three data points suggest that the economy may be turning the corner, they don’t offer conclusive evidence that there will be a period of sustained growth. The Index of Industrial Production (IIP) has registered a 2 per cent growth in February after three consecutive months of decline. While it is significant that industrial activity is returning to the expansionary mode, the cumulative growth rate of 2.6 per cent in the first eleven months of this fiscal doesn’t call for cracking open the champagne. After all, this is lower than last year’s 2.8 per cent and also well below the 6 per cent expansion in output the country has averaged in the last ten years. As for the dip in consumer price inflation to 4.8 per cent in March from over 5 per cent, this moderation, particularly in the food component of the index, is good news as it puts more disposable income in the hands of consumers. But then, low inflation rates have a flip side too. By hurting nominal GDP growth and corporate revenues, very low inflation can adversely impact job prospects and income growth, both of which are crucial for the feel-good factor in the economy. A third trigger to growth is expected from the Reserve Bank of India’s accommodative policy stance on both interest rates and liquidity, reiterated in its recent review. It is perhaps this, combined with the Centre’s concerted push on promoting infrastructure and encouraging start-ups, that has prompted RBI Governor Raghuram Rajan to predict that India is poised for a ‘leap in production’.
While the stimulus measures will take some time to play out, one factor that could have an immediate impact on the economy is a bountiful monsoon. The IMD’s forecast that there is a 64 per cent probability of the South West monsoon bringing in above-normal or excess rain is indeed good news after two consecutive seasons of drought-like conditions. Erratic growth in agriculture has been the wild card in India’s GDP estimates in recent years. In 2015-16, industry and services were estimated to grow at 7.3 and 9.2 per cent, respectively, while agriculture played spoilsport at 1.1 per cent. Though the farm economy contributes just 17 per cent of India’s GDP, the last two years have provided ample proof that rural distress has a disproportionate impact on consumption. Given that the sector employs nearly half the workforce, everyone from toilet soap manufacturers to light commercial vehicle makers looks at rural spends to shore up bottomlines. Policymakers may not like it, but at this juncture it appears India’s economic prospects are still dependent on the benevolence of the rain gods.
A firm handshake, not an embrace
Definitive changes in policy do not happen suddenly one day; often they happen over weeks and months, and sometimes years. The three-day visit of U.S. Defence Secretary Ashton Carter, appears to fit into a new security paradigm that is unfurling under the Narendra Modi government. By agreeing to sign the Logistics Exchange Memorandum of Agreement (LEMOA), India has sent out a clear signal that it has no inhibitions about being bound in strategic engagements with the U.S. Once concluded, the agreement would give American aircraft and warships access to Indian military bases for logistical purposes, including refuelling and repair. In turn, India’s military will enjoy similar access to U.S. bases. This would qualitatively transform India’s relations with the U.S. The logistics agreement had been first proposed officially in June 2004, but the UPA government remained wary of seeing it through. The then Defence Minister, A.K. Antony, in particular was concerned that it was too intrusive and could also be perceived as a signal that India was jettisoning its policy of non-alignment. Indeed, for all the atmospherics of the American visit this week, it appears that the NDA government shares some of the UPA’s reticence, especially on India-U.S. issues that have multilateral implications or that could impact India’s relations with other countries. Significantly, the logistics agreement, one of three ‘foundational agreements’ the U.S. has been insisting on, was not signed in the course of Mr. Carter’s visit, as the Americans had expected. This gives New Delhi time to tackle the ongoing domestic debate over a possible loss of sovereignty.
While the joint statement refers to ensuring freedom of navigation in the South China Sea, Defence Minister Manohar Parrikar has been careful to avoid the U.S.’s repeated references to ‘joint patrols’. Even the agreement on sharing data on commercial shipping traffic that Mr. Carter had expected to conclude during his visit will be the subject of another round of talks. The pause is wise. New Delhi must take a considered view of the repercussions that such a strategic alliance may have for India’s relations with other countries. Moreover, the U.S. administration will change in the year ahead, and it would be wise to wait for the next. Significantly, India’s concerns about continued American military funding and defence transfers to Pakistan still remain unaddressed. Meanwhile, Mr. Parrikar and Mr. Carter have agreed to expand collaboration under the Defence Technology and Trade Initiative, infuse greater complexity in their military engagements and maritime exercises, commence discussions on submarine safety and anti-submarine warfare, and initiate a bilateral maritime security dialogue that would include diplomats and the defence establishments. A firm handshake with the U.S. is welcome, but it need not be an embrace, just yet.