Can the low inflation pill revive the economy?

Tue, 30 Dec Pre-Open

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The Indian economy is at the threshold of an important phase. Inflation level has almost fallen to zero aided by softening commodity prices coupled with a dramatic fall in the price of crude. Even the strong pro-reformist stance taken by the Modi government has spurred a lot of optimism in the economy. But is this enough to kick-start the economy back onto the high growth track?

Not quite so. These can be enabling factors but the principal driver for growth will be the actual pick-up in the investment climate. And investments will gain momentum only in an atmosphere where there is reasonable certainty of increase in the overall demand in the economy. While India Inc. is enthused by the announcement of strong reformist measures by the government, it still awaits for more concrete action on ground. History has shown that increased public investments in the country's capital formation have led the way for strong economic growth. During the period 2006-08, when the GDP growth spurted over 9%, capital expenditure by the government as percentage of overall expenditure rose sharply. Therefore increased public investment in the country's infrastructure is the need of the hour. This in turn is likely to facilitate flow of private investments and provide the much needed boost to infrastructure development.

Apart from this, the government also needs to work towards putting its reformist policies into action. On account of disruptions in the winter session of the parliament, the government recently passed ordinances for coal auction, launch of electric vehicles and increased foreign direct investment in insurance. Although this step points towards the government's strong intent towards policy reforms, but ordinances have a validity of only six months for being approved and promulgated into law. Until that happens, companies will remain cautious in their investment plans.

India is in a sweet spot. Not only have the recent measures by the government attracted the attention of the global investment community but even the slide in energy prices has helped it rein in fiscal deficit. Now the government needs to rejuvenate overall demand through increased spending on infrastructure and expedite the formulation of policies. This in turn will create the right environment for investment by the private sector. Of course low inflation will aid in the earnings growth and provide a further leg-up to the economic recovery.