Economy on a steady growth path despite blips

It is well known that 1991 was a watershed year in India’s economic history. As the country celebrates 70 years of Independence, it is critical to do a health check of the economy and see how it has fared since. The course correction in 1991 was forced by circumstances and the country embraced a more open economy.

A clear message that has come out is that the direction of policy stance — to be a more open economy and encourage foreign investments — has not changed in the last 26 years. India has kept the faith on pursuing a market-oriented open economy strategy despite unexpected challenges like the 2008 global financial crisis and several irregularities between 2011 and 2014 that dented the credibility of the then UPA-II Government. The spate of irregularities had somewhat created a policy paralysis, leading to fall in growth levels as compared to the Golden Period of 2003-08 (when the country even hit 9 per cent growth levels)

This has indeed worked in India’s favour with the country now emerging as one of the fastest growing large economies of the world.

The pace of economic growth may have faltered in recent years, but India has only progressed despite the State’s overarching presence in most economic activities.

There is no doubt that the country only gained from its decision to unleash the animal spirits in sectors such as information technology, oil refinery, pharmaceuticals, telecom and to some extent banking, giving a larger role for the private sector. A large part of the credit should go to former Prime Ministers Narasimha Rao and Manmohan Singh (who was Finance Minister in 1991 Congress-led Government). The successive Finance Ministers – P Chidambaram, Yashwant Sinha, Pranab Mukherjee — kept the tempo going and ensured that India did not completely retract from the path of a free market open economy. The current dispensation — led by Prime Minister Narendra Modi — is also not in any manner looking to alter this trend.

A strong capital market infrastructure — built in the last two decades — has only helped in the economic transformation journey.

To gauge the extent of transformation of the Indian economy, sample the following two macro data points: In 1991, the country’s foreign currency reserve, at the height of the economic crisis, was just $1 billion. Today, the forex reserves have gone up to a record $385 billion (as of end June this year).

The total foreign investments (both portfolio and foreign direct investment) in 1991-92 were hardly $150 million. Foreign Direct Investment (FDI) hit an all-time high of $60.1 billion in 2016-17. The cumulative value of investments by Foreign Institutional Investors (FIIs) during April 2000-December 2016 stood at $183.69 billion.

In the last three years, the Government has eased 87 FDI rules across 21 sectors to accelerate economic growth.

Now, the big question is whether the current average GDP growth rate of 7.5 per cent is sustainable in the coming years. It would be if only the Government were to allow the private sector to have larger role in certain sectors of the economy and dilute its entrenched presence; have robust disinvestment strategy and do nothing that will disturb the economic growth engine.

A case in point is the banking sector — nearly 80 per cent of the banking assets are still controlled by public sector banks, which have in the recent years lost their glory due to their inability to recover the funds provided to some high profile and recalcitrant borrowers.

The ballooning non-performing loans situation have also compelled the government and the Reserve Bank of India to take urgent actions through enactment of Insolvency Code and empowering the central bank to refer cases of erring borrowers for insolvency proceedings.

Another interesting data point to show how the Indian economy has expanded in the last two decades is the direct tax receipts. In 1998-99, the country’s total direct tax collections stood at ₹44,600 crore. This progressively increased to ₹3,14,468 crore and is budgeted to touch ₹9,80,000 crore in 2017-18.

It is this surge in tax collections that has encouraged the Centre to share a larger 42 per cent of the central tax receipts with the State Governments.

While the taxpayer base has increased due to better tax administration and introduction of technology, what should be of worry to policymakers is that inequality has sharply increased in the recent years.

The story is even better (over the last two decades) in indirect tax receipts front with collections budgeted at ₹9,26,900 crore in 2017-18.

The crucial outcome that would have a bearing on the economy is how Goods and Services Tax (GST) gets implemented in the coming months and whether it is revenue-augmentative to the States. Coupled with the effects of demonetisation, India is staring at a huge challenge that could pull down the growth levels or take it back to the much desired 9 per cent growth trajectory. Only time will tell which way the country will go on the GDP growth front.