India's quality of growth improving, says CRISIL

The critical factor for growth will be how the monsoon plays out. Assuming a normal monsoon, Crisil estimates that growth could touch 7.9% in 2016-17

CRISIL has pegged India’s economic growth at 7.9 per cent in 2016-17, assuming a normal monsoon. Unlike the “rubber-band” recovery that India witnessed after the global financial crisis of 2008, aided largely by fiscal and monetary stimulus, this time  the quality of growth has improved, says CRISIL in a new report.

With the global economy struggling, India had embarked on a massive fiscal and monetary stimulus. As a result, growth perked up initially only to collapse when the stimulus was withdrawn.

CRISIL notes that the “policy focus hasn’t been based on populism or on boosting cyclical growth through fiscal and monetary stimuli, but rather on improving the ‘trend’ growth by repairing the system and initiating structural reforms wherever possible.”

While these policy initiatives are likely to improve the trend growth in the short term, the critical factor will be how the monsoon plays out. Assuming a normal monsoon, CRISIL estimates that growth could touch 7.9 per cent in 2016-17, just shy of the 8 per cent mark.

The National Democratic Alliance government, under Narendra Modi, has worked to ensure macro-economic stability. It has resisted calls for relaxing its fiscal deficit limit and has opted for improving the quality of its expenditure. It has ramped up spending on infrastructure, roads and railways in particular, increased taxes on petrol and kept the fiscal deficit in check. It has also formalised an interest rate targeting regime with the Reserve Bank of India to keep inflation under control.

Steps to improve macro-economic stability have been accompanied by reforms to improve growth. As CRISIL notes, “structurally positive steps have also been taken such as to mend the electricity and banking sectors, but these remain work in progress.”

Further, “the government has also managed to pass two key Bills — the Insolvency and Bankruptcy Code Bill, 2016 —  which strive to create an enabling environment for expeditious resolution of bankruptcies with least pain to stakeholders, and the Aadhaar Bill to distribute subsidies, rural wages and pensions through an electronic platform,”  it said.

Reflecting on these moves,  Dharmakirti Joshi, chief economist, CRISIL said, “The focus on quality of growth and repair and reform initiatives means there will not be significant upsides immediately. But if relentlessly implemented, they will do more to raise India’s trend — rather than cyclical — growth that we are seeing now. We believe this will remain work in progress for some time and the momentum needs to continue through the political cycle, which will restart next year, to get maximum bang for the buck.”