Can policy reforms influence growth rate?

Wed, 3 Aug Pre-Open

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The Indian economy has been growing at a steady pace since the last decade. Rising consumption and increasing investments boosted growth prospects. Congenial interest rate environment encouraged private investments which generated capital for future growth. Even exports were trending upwards due to strong global demand. Thus, a combination of rising consumption, investments and exports steered the growth prospects of the economy.

However, the current state of affairs signal that the future growth prospects (near term) have turned lukewarm. While consumption is on a steady rise, investment cycle has taken a backseat due to rising interest rates. Considering the global demand environment, even the high growth in exports witnessed in the past does not appear to be sustainable.

In light of these factors, the Prime Minister's Economic Advisory Council (PMEAC) finally lowered its growth projection of the Indian economy to 8.2% (from 9.0%) for the current fiscal.

The primary reason for downward revision is the anticipated slowdown in the manufacturing sector. And with inflation remaining above the comfort zone, RBI is unlikely to lower the rates anytime soon. This would further act a deterrent for industrial capex and thus manufacturing growth.

Power sector is another culprit which has led to the downward revision in forecast. We know that India growth story is strongly linked to the power sector. And right now, there are quite a few issues that have been plaguing the power sector. Coal availability, land acquisition issues and environmental clearances are a few of them. Unless these policy issues are sorted out, growth targets will continue to get impacted.

Lastly, while external factors like growth in exports are unpredictable, there is a strong need for policy reforms (not only in the power sector) which encourage private investment. Agreed that interest rate is a prime concern, but it is not the only factor impacting the investment cycle. For instance, reforms that encourage FDI and FII inflows will not only bring in capital but also generate employment opportunities auguring growth.

Thus, policy reforms are a need of the hour if India has to clock a respectable growth rate over the longer term. While rate cycle governs growth rate in the near term, it is policy reforms that determine growth over the longer term. And considering the coalition government in place (difficult to arrive at a unanimous decision) it is difficult to say when the reforms will ultimately see light of the day.