Economic challenges in New Year

There is no doomsday scenario awaiting India on the economic front in 2015. There will be problems but India will remain a global giant with its huge, mostly young, population, a big market and vast resources. Since there is no real social safety net, people are resilient and adapt to adverse situations. Political upheavals are thus unlikely.

 There will, however, be no spectacular rise in economic growth because the way things are going the government will not be able to control either the fiscal deficit (in December 2014, the fiscal deficit had reached 98.9 per cent of the budgeted total) or the current account deficit (at 2.1 per cent of the GDP in December, 2014).  Managing the twin deficits will not allow the government to keep its tall promises of bringing 'achhe din'. The economy will grow at 5 or 5.5 per cent, which is not high enough for harmonious and equitable growth or a steep reduction in poverty.

First of all, from all indications, the revenue shortfall will be massive (Rs 1,05,000 crore). To bridge the revenue gap the government may have to cut the expenditure where it is most needed--in the social sector. It is already apprehended that the health sector will be the first to receive the cut which will of course have its repercussions on the healthcare of the poor. Already the public healthcare is below par and it will be more so. The poor will be the ones who will have to bear the brunt and sink further into poverty.

Similarly, the current account deficit will remain a problem with the continuing heavy import of gold and flat export growth. Modi's exhortation to the people to put their money in banks and not buy gold will only work when people are sure about the continuity of low inflation. Even with a fall in petroleum prices, there are problems in imports and more problems in exports. Global markets are not recovering strongly and India's exports to the EU, Russia, Japan and the Middle East will be lower.

People will also not forget that black money remains stashed abroad and this could have been brought back and used for development. People will also remain perplexed why the big industrialists, who remain the biggest defaulters of bank loans and still flaunting a high lifestyle, are not being made to pay back debts. When public sector banks are in such bad shape (NPAs at Rs 2.16 lakh crore), how is it that these industrialists are allowed to go scot free? All this may not generate confidence in the governance of the country which Prime Minister Modi promised to improve. 

The pledged FDI will hopefully improve the manufacturing growth and this may lead to a rise in the employment of youth. It will depend on the techniques chosen for manufacturing by foreign investors. As the recent Annual Survey of Industries points out, job growth has slowed down and companies have been shedding labour to keep their bottom lines up. If Modi is not able to give jobs to youth, the NDA government will become unpopular in 2015. A lot of young people voted for him on his promise to generate jobs. Around 10 million job seekers look for work every year. 

High interest rates have been blamed for slow manufacturing growth. Interest rates will come down in 2015 but it is not a magic wand for raising industrial growth. There are many twists in the story as to why investment is flagging in industry and one scenario is the nexus between politicians and industrialist promoters, which leads to money being raised by the promoter for equity purposes but diverting it elsewhere with the connivance of politicians.

The land acquisition Act has been amended by an ordinance. It will stir up a lot of opposition and rightly so. As long as this area remains ambiguous with potential for trouble from especially small land owners, investors may want to wait and watch. This is likely to stall the growth of SEZs.

In agriculture, huge reforms are needed where 52 per cent of the population is employed. Agriculture is likely to grow at 2 per cent due to the impact of a deficient monsoon. Agricultural productivity has to be improved through better irrigation, seeds, fertilizers and mechanisation. This has to be supported with better marketing and storage. Small farmers will be looking for support and a drastic change in the credit structure. The Jan Dhan Yojana has been started with bank accounts created for 98.4 per cent of the population but the actual money that can be accessed by people will matter most. Around 75 per cent of the accounts have no money in them.

 Unless agriculture productivity improves, there would be a rise in rural unemployment and migration to cities will continue where unskilled labour will flock to the informal sector and live in shanty towns and slums.

Modi's talk of smart cities will remain a pipe dream if the existing towns/cities are left untouched and remain unmanageable. Smart cities will take time and require a huge expenditure. It will not be possible to establish them overnight by magic. Implementation of the dream will prove to be more difficult than conceptualising it. 

The service sector may face fewer problems and it may be poised for a high growth of 7 per cent. Much will depend on global demand also. But most likely the ITC services will see a positive growth because the demand will remain high.

Low-income people will continue to struggle in 2015 as before with problems in housing, transport, health and education. Their incomes will not rise except incrementally. The super-rich and very rich will continue with their high lifestyles. The inequalities are likely to widen. The small-scale industry will remain inventive and innovative, trying to beat competition from China and some may switch to trading from manufacturing, reversing Modi's dream of 'Make in India'. The 'achhe din' are not likely to be here soon except for the rich and the famous.