Have Achhe Din Finally Arrived?

Tue, 2 Aug Pre-Open

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Chief economists of leading private sector banks and rating agency are bullish on India's economic prospects. Their bullish views are on the back of good monsoon, increasing public investment coupled with a recovery in urban and rural consumption. If experts are to be believed, India could grow by 8% during the current fiscal year.

However, we believe that achhe din is still a distant dream. Experts are betting on good monsoon to drive the growth in the economy. However, historical trends suggest that there is not a strong co-relation between a good monsoon and farm incomes. Apart from a favorable monsoon, farm incomes are majorly dependent on minimum support prices (MSP) and construction activities. Both these factors have remained suppressed in the preceding two years. There has hardly been any upward movement in the MSP. The construction activities too have remained subdued, wherein a significant chunk of rural people are employed.

Further, the experts are betting on the seventh pay commission to drive the growth in urban consumption. In fact, that is how things played out in the aftermath of the fifth as well as sixth pay commissions, once their recommendations had been accepted.

The higher salaries and pensions led to a higher consumption.  A major reason for higher consumption in the last two times was the fact that the Pay Commission increases came much after they were due. The Sixth Pay Commission increase was due from January 2006. But the report was submitted only in March 2008 and accepted by the government in August 2008. Hence, arrears had to be paid and they were paid only in 2008-2009 and 2009-2010. This meant that people suddenly ended up with a lot of money in their hands, as payments were made.

However, this is not the case this time which essentially means that people will not suddenly end up with lot of money in their hands. Hence, it wouldn't create a major spurt in the consumption patterns.

Further, increasing inflation and the outflows from the seventh pay commission will lead to lower public expenditure by the government. Apart from this, a lot of structural issues need to be addressed, such as amendment to our labour laws.

Though India is the fastest growing economy in the world, there still needs to be a lot of work to be done for the achhe din to arrive.

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