India: Growth Equations and Budgets – Mr. DK Joshi ( Chief Economist, Crisil)

On 11th March 2011, Meghnad Desai Academy of Economics invited Mr. DK Joshi, Chief Economist at Crisil and Dr. Tushar Poddar, Chief Economist at Goldman Sachs to discuss the opportunities and challenges to India’s economic growth in the fiscal year 2016-17. Mr. Joshi began the talk by remarking that one the biggest risks to the Indian economy is the global slowdown, and it is the domestic economy which will drive its economic growth. He also said that 2016 is a critical year because we’re halfway through the term of the new government, and have to yet to pass a few bills in the parliament which would give a boost to the domestic economy and foreign investment. For instance, the Goods and Services Tax bill should be passed to improve the efficiency of the goods market and Bankruptcy Code needs to be implemented to strengthen creditors’ right.

Mr. Joshi also mentioned that the economy has no room for “pump priming” (boosting demand through investment spending). The government has been implementing fiscally prudent policies to reduce our huge fiscal deficit by slashing capital expenditure to meet its revenue requirements, which was also aided by the low prices. However, the government has not reached its divestment requirements, which means cutting capital expenditure will be required again. And this is exactly what happened in the recent Union Budget – capital expenditure was restructured and aimed at segments with high multipliers, such as roads. While this may not necessarily boost demand, it does have other benefits like reducing the cost of public and private borrowing, helping RBI cut the policy rate and aid monetary policy transmission.

While discussing the forecasts for India’s growth in 2016, Mr. Joshi said that India’s growth is dependent on monsoon; a good monsoon season would improve the performance of the agriculture and relieve rural distress to an extent. When looking at the macroeconomic indicators, India has improved tremendously since 2012-13 by reducing its current account deficit and inflation. However, a closer look reveals that India has not done so well in its GNPA to Advances Ratio (increased from 3.3% in 2012-13 to 7.7% in 2015-16) and Investment to GDP Ratio (reduced from 34.1% to 31.7%). Despite this, Crisil has a forecast for 7.9% growth rate for India. The reason for this is because Mr. Joshi believes that private consumption will the driver of growth due to the following:

  1. An increase in pension funds and government remuneration will increase consumption
  2. Monetary policy transmission will be faster this year because of two reasons: the economy will now feel the effect of the rate cuts from last year; and benefit from RBI’s switch to using marginal cost of funding in its policy decisions
  3. Low oil prices will continue to aid the economy
  4. Expectation of a normal monsoon because of the weather phenomenon “la niña”
  5. The recent budget focused on the rural sector which should also boost consumption and increase the rural-urban balance

All these factors combined will lead to capacity utilisation. However, global growth and private corporate investment won’t increase consumption. Further, fall in exports and industrial production can also be a detriment to growth. Industrial production, in particular, is a challenge since it has failed to pick up since the Lehman Brother crash in 2008. Loose fiscal policy, policy rate cuts pushed the demand up and revived manufacturing to a growth rate of 6.9% in 2009-10 (compared to 2.5% in 2008-09). However, inflation reached 10%, fiscal deficit was at a high of 7% which led to fiscal prudence and monetary policy tightening during the scam years which affected the sunrise sectors like telecom and brought down the IIP to 1.5% in 2010-11. Thus, the manufacturing sector needs an impetus, and the government has taken steps in this direction by imposing tariffs on our manufacturing imports and providing incentives for exports. The economy is also facing two more growth constraints – high debt of the infrastructure companies and bad assets/non-performing assets (NPAs) in the banking sector.

Dr. Poddar then asked Mr. Joshi about how big of a drag can this high leverage be for the economy. Mr. Joshi replied by saying that the problem of high leverage is mainly present in the big firms who follow the investment cycle. Further, debt accumulation in high in areas that are commodity linked such as steel, metals, power and telecom – all these sectors are facing slow recovery. Thus, the problem needs to be dealt with immediately.

Mr. Joshi ended the talk by remarking that the epicentre of risk does not lie with the advanced economies, who are still slowly recovering from the global slowdown. Instead, the risk lies among the BRICs nations – Russia and Brazil are facing an economic crisis with negative growth rate predictions, South Africa’s growth is not picking up, and China is facing a slowdown. The only stable economy in the pack seems to be India, who is also forecasted to have the highest growth rate among the emerging economies in the coming year. Mr. Joshi and Dr. Poddar then took questions from the audience.





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Date(s) - 11/03/2016
4:00 pm - 6:00 pm

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