Economic challenges for 2015
THE new year is likely to be shaped by the way the government moves on the policy front. The year 2014 ended broadly on a positive note for the Indian economy and financial markets, though challenges have not completely abated. The new year is likely to be shaped by the way the government moves on the policy front. The global environment, however, continues to remain weak, despite faster-than-anticipated growth in the US. Economic activity in the euro area continues to remain subdued with an imminent threat of deflation; the Japanese economy has contracted for two consecutive quarters; and China, so far, has avoided a hard landing but is slowing.
Also, commodity exporting emerging economies are headed for financial hardship. The Russian economy, for example, has contracted by 0.5% in November along with falling currency and rising prices. In an environment where the global economy cannot be termed exactly supportive and there could be a risk of "unknown unknowns", the best hope for India will be swift moves in policy making, targeted to boost economic activity.
If 2014 was the year of decisive political change, it will serve the economy well if 2015 shapes up as a year of decisive policy thrust. However, progress in this direction could be more difficult than previously believed and signs of this have started to emerge. After not being able to push legislations in the winter session of Parliament amid constant disrup- tions by the opposition, especially in the Rajya Sabha, the government has taken the ordinance route to make and amend necessary laws. After promulgating the ordinance to amend the insurance Act [Insurance Laws (Amendment) Ordinance 2014], the government is now close to another ordinance to amend the land acquisition Act (Land Acquisition, Rehabilitation and Resettlement Act, 2013).
This is after it re-promulgated the coal ordinance [The Coal Mines (Special Provisions) Ordinance, 2014]. While the government has shown the intent that reform process and law making cannot wait, to be fair, the ordinance route will only serve a limited purpose for the simple reason that it will still have to be vetted by Parliament in the next session. If the government is unable to get the approval, it will have to reissue all of them.
For the record, according to the Constitution (Article 123), President of India can promulgate ordinances if Parliament is not in session and immediate action is needed. However, for continuance, parliamentary approval is needed within six weeks of its reassembly. If the legislature is unable to enact the law within the stipulated time, the ordinance will expire and the government, if need be, will have to repeat the process.
It is important to note that business environment in the country got affected in recent years because of uncertainty in policy making, but the ordinance route to law making, despite the intent of creating a better environment, may not yield the desired outcome. In fact, in the next session, the reason and need for these ordinances can itself become the cause of confrontation between the treasury and opposition benches, which can lead to more problems, defeating the entire purpose.
Another major challenge for the government will be the management of its own finances in a setting where it is widely expected to push growth.
The mid-year economic analysis by the finance ministry indicates that the last budget had seriously overestimated revenues. Overestimation was both in terms of tax buoyancy and nominal growth in the gross domestic product. Put together, the budget overestimated revenues by about Rs.1.05 trillion. As a result, fiscal deficit in the first half of the year (April-September 2014), has reached 82.6% of the budget estimates compared with a fiveyear moving average of 58.8%.
Therefore, to meet the deficit target, the government will have to rework its plan; any curtailment of expenditure will affect growth. The government expects the economy to grow by 5.5% in the current fiscal.
Interestingly, the mid-year review has argued in favour of higher deficit to kickstart investments. "…consideration should be given to address the neglect of public investment in the recent past and also review medium term fiscal policy to find the fiscal space for it," the review said. The government will be best advised not to actively consider this option.