Government has taken serious measures towards economic reforms, but it is still in the midway due to non-cooperation by opposition.
Modi’s foreign visits have faced severe criticism from the opponents but it has a positive impact on the inflow of funds and as per the data released by DIPP, FDI inflow has registered a growth of 31% and increased from USD 7,235 million (Q1 FY 2014-15) to 9,508 million (Q1 FY 2015-16). It is a clear sign that government is able to restore the investors’ confidence and despite fall in Chinese and Brazilian economy, India remains a bright spot in the emerging market. Economic performance of the government based on the key indicators is given below-Indirect tax collection has increased by 35.9% for the period April-October 2015 and excise duty collection has recorded 69% growth which clearly indicates that the underlying tax base has increased. Government took additional tax measures in the current fiscal (like increase in service tax rate from 12.36% to 14%) and growth in tax collection is 12% after stripping away the impact of such measures.
Nikkei Industrial Purchasing Managers’ Index (PMI) shows Services PMI has increased to 53.20 after going below 50 in the previous months. However Manufacturing PMI has come down to 50.7 which is a temporary phenomenon (a reading above 50 indicates an expansion in business activity and below 50 indicates contraction). Although annual industrial output grew at a lower than expected rate of 3.6% in September’15 but it may be noted that the industrial production expanded 6.4% in August’15 and the decline in September is on account of certain industry specific factors. Industrial production is improving continuously (except few months) since FY 2013-14.
As per data released by Ministry of Commerce and Industry, there is a decline in exports in the current fiscal but imports have contracted significantly (25.1% for period ended September’15) and our trade deficit came down to USD 10.5 billion as compared to USD 14.2 billion for the same period. However decrease in imports is largely on account of decrease in crude oil prices.
Government is able to contain the inflation within reasonable limits and consumer prices increased to 4.4% in September from 3.7% in August. However the consumer prices are increasing on a monthly basis and it increased by 0.97% in August and 0.48% in September which can be a cause of concern for the government.
A small dose of inflation is required to keep the production cycle moving, but it should not exceed the psychological benchmark of 5%. On the contrary to the consumer prices, wholesale price index fell by 0.06% in September and 0.45% in August. Although there are different weights assigned to different commodities while calculating the inflation but it is expected that since there is decrease in wholesale price index it will eventually help in easing down the consumer prices. Reserve Bank has recently announced a rate cut by 50 basis points which will reduce the cost of debt and help to boost the investment cycle. However rate cut will have an impact on the inflation but the government has to look at increasing the production to check the inflation. Data released by DIPP indicates that the government has to go a long way for the success of ‘Make in India’ vision. Investment proposals are decreasing YoY basis, both in terms of number of proposals and proposed investment (refer table above). However from a perspective it may be noted that actual investment is increasing in the country. Gross fixed capital formation as percentage of GDP reduced to 8,072 billion INR in second quarter of the current year from 8,548 billion INR in first quarter. There is a decline after continuous increase for four quarters. This is an important indicator about the investment cycle and it can be a cause of concern for the government.
On a macro level, inflation remains at normal level and industrial production has also shown some positive signs. Reserve Bank has also decreased the interest rates, which will help to stimulate investment. Government has taken various measures towards reducing the procedural aspects and making India as attractive investment destination. However lot more needs to be done and it will be dependent on the support of opposition on crucial bills.
Shshank Saurav (The writer is a Chartered Accountant)