H2 growth depends on speed, range of policy actions

Favourable macro conditions should help growth recover

The estimates for the economy's gross domestic product (GDP) during the July-September quarter of this year were published last Friday. GDP grew by 5.3 per cent over the corresponding quarter of last year, somewhat slower than the 5.7 per cent in the current year's April-June quarter - but, on the other hand, somewhat faster than many analysts were expecting. The main contributors to growth were agriculture, and community, social and administrative services. The former grew by 3.2 per cent during the quarter, taking its first half growth rate to 3.5 per cent on an already relatively high base of 4.5 per cent during the first half of 2013-14. Agriculture seems to be staying above its long-term trend rate of growth. Given the overall performance of the monsoon, this was a counter-intuitive outcome. The latter grew by 9.6 per cent, compared with the 3.6 per cent clocked in the second quarter of last year. This category largely captures public expenditure, and its acceleration suggests emerging problems on the fiscal front. The big negative was the performance of the manufacturing sector, which grew by a tiny 0.1 per cent during the quarter, after having achieved a relatively good rate of 3.5 per cent in the previous quarter.

In sum, the first-half numbers are appreciably above the growth achieved in the corresponding half of 2013-14. This suggests that the economy is climbing out of the trough that it fell into over the past couple of years. However, the prognosis for the second half and beyond should be based on more than this incremental recovery scenario. The sharp decline in crude oil prices over the past few months, for which there seems to be no floor in the short term, has completely changed the macroeconomic landscape for India. Inflation is coming down far quicker than expected, bringing monetary policy back into the growth game over the next few months. The current account compression that was achieved through forced reduction in gold imports last year is now sustainable. And the decline in fuel and fertiliser subsidies as a result of lower oil prices should ease fiscal pressures, which, however, are mounting because of poor tax revenue growth. All in all, there has been a 180-degree turn in the situation. Against this backdrop, the potential for the economy to accelerate growth has increased considerably.

It won't happen automatically, of course. Favourable macroeconomic conditions will facilitate growth acceleration, particularly through a turn in the investment cycle and increasing consumption spending. The latter might take place quite quickly, resulting in some pick-up in the second half itself. The former, however, will depend on the speed and range of policy actions to deal with a variety of oppressive barriers to growth - infrastructure being a prime culprit. As long as oil and other commodity prices remain soft, which now seems to be very likely, these favourable conditions will persist. Unfortunately, however, macroeconomic stability has never been a situation in which Indian governments have been able to do much by way of reform. The country's economic future depends entirely on whether this government can break that mould.