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5 economic indicators the new govt will need to fix

Last Updated: Wed, May 14, 2014 09:21 hrs
Food inflation

If the final results are in line with the exit polls numbers, chances are that we will see a clear mandate to the Narendra Modi-led National Democratic Alliance (NDA). The market expects that a clear mandate would result in better governance, as was seen in the case of UPA II when the indices were locked at the upper circuit after the Congress government won much more seats and was expected to perform much better. In Narendra Modi's case, expectations are higher given his claims about the Gujarat model.



Whoever becomes the next Prime Minister, the only constant is the challenges in front of him or her. The economy is in a mess, to put it politely. Recent economic data released by the government highlights the decay.

Following are the five economic indicators that desperately need a course correction.

CPI

After corruption, inflation was the biggest issue in the recently concluded election. The number released on Monday shows that the Consumer Price Index (CPI) rose from 8.3 per cent in March 2014 to 8.6 per cent in April 2014. The main culprit, as has been the case over the past few months, has been food inflation. While higher food prices affect everyone, they seriously impact the lowest strata of society, which comprises the sincere voters. With some state elections lined up towards the end of the year, the new government has a task cut out for itself.

As luck would have it, there is a serious threat of lower monsoon on account of El Nino. Controlling inflation, especially food prices, would be a herculean task.

Interest rates

Finance Minister P Chidambaram blamed higher interest rates for slower economic growth instead of the much debated 'policy paralysis'. Corporate India too has been complaining about how high interest rates are affecting their plans. Buyers of homes, automobiles and consumer goods have the same grouse. However, RBI has maintained that it has been forced to keep interest rates higher on account of higher inflation.

How the new government would like to perceive it can be judged from a quote of Rajya Sabha leader of the opposition, Arun Jaitley of BJP, when in an interview with The Times of India he said, "This whole interplay of inflation-controlling measures and interest rates being the key under the UPA made the economy more sluggish. Therefore, we would eventually like to see a softening of interest rates. You can't have a competitive economy with high interest rates".

RBI has been adamant on using interest rates as a tool to control inflation. It would be interesting to see how it sticks to its policy when the new government steps in.

IIP

Industrial activity, as measured by Index of Industrial Production (IIP), has been continuously slipping and has stepped into negative territory. Most worrisome is the persistent falling growth in the manufacturing sector. And within this sector, the biggest area of concern is the prolonged negative data print in capital goods which indicates no new capacity addition, and which could push growth going forward.  

The BJP has been talking of propping the manufacturing sector and has cited it as one of the main reasons for not allowing FDI in retail.

GDP

IIP forms a part of the overall economic growth which is better measured by GDP, which includes primarily services and agriculture. The BJP has been talking about the kind of inclusive growth that has been demonstrated in most states ruled by the party. In these states, apart from manufacturing, agriculture and services have also contributed to growth.

Analysts believe that GDP has bottomed out and that the country will see higher growth rates going forward. Best-case estimates however, continue to be around 6-6.5 per cent for FY16. It would however, take a much higher growth rate for the new government to prove its mettle.

Investments

Investments in the economy almost completely dried during UPA II. FDIs, which the government has been showcasing, were mainly on account of buying out of residual stakes by foreign companies in their Indian subsidiaries. Very few assets have actually been created, as is pointed out by the steadily declining gross fixed asset capital formation (GFCF). Policy paralysis has been blamed as the main reason for a decline in asset creation. The new government will not only have to give Corporate India the confidence to invest, but will also have to provide them with the means. Land and labour reforms have long been neglected. Further, banks have been shying away from lending to new projects. A new government will also have to take the banks into confidence, which would be a tough task given the rising non-performing assets (NPAs) of most of the banks (especially in the public sector space).


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