Has the Government Got it Wrong?

Fri, 11 Dec Pre-Open

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The Modi government has been in power for one and a half years. Its mandate to revive the economy was clear. To its credit, the government has taken several measures to boost growth. These include the launch of initiatives like 'Make in India', changes to industrial and labour laws, easing of foreign investment rules, speedier project clearances and a major infrastructure push.

Falling commodity prices especially crude oil, has helped immensely as have the rate cuts and reforms initiated by the RBI. Industry has welcomed these initiatives. But the recovery is yet to pick up steam.

India's industrial production as well as manufacturing sector growth continues to be dull. The external sector (both imports and exports have crashed). The rural economy is struggling on the back of consecutive monsoon failures. Job growth is yet to pick up as several sectors continue to face muted prospects.

Questions are now being raised about the government's investment-led growth model as opposed to the consumption-led growth during the UPA years. While the fiscal deficit is in check, government spending has not boosted consumption. This is because money is being spent more on infrastructure and relatively less on welfare schemes.

This transition will clearly take time to be completed. In the meantime, growth will remain under pressure due to relatively lower consumption in both the public and private sectors. Speedier reforms would have made matters easier. Unfortunately, the government hasn't covered itself in glory on the pace of economic reforms.

An article in the Economic Times quotes many leading Dalal Street participants who are ruing this missed opportunity. The fall in consumption, they say, has hurt sales growth for corporates. This in turn has led to stagnant earnings. The fall in commodity prices cannot help corporates beyond a point. If consumption growth picks up, corporate sales will too.

However, this does not mean that the government should abandon its investment focus. Consumption driven growth has its limits. It also tends to fuel inflation as was evident in the UPA era. With inflation coming under control, we believe the government would do well to speed up its reform agenda rather than getting tempted to loosen its purse. However, this is easier said than done.

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