Good luck and good policies

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In Brazil, where I come from, we are crazy about football, so I grew up listening to football matches. At the end of a match, the reporters would interview the main scorer of the day, who would often say that he was just lucky to receive the ball at the right place.
The commentator would then say that “good luck is a combination of ability and opportunity”. This story comes to mind when thinking of India’s economy over the past two years.
India has been lucky indeed. In the fiscal year ending March 2016 (FY16), the sharp decline in oil prices generated what economists call a positive “terms-of-trade” shock, which lifted growth.
A terms-of-trade shock means that the things you buy suddenly become cheaper relative to the things you sell, allowing you to buy more things.

In the fiscal year that just ended, CSO data that was released recently shows that the good monsoons helped agriculture propel growth. Notwithstanding disruption from demonetization, agricultural wages have continued to grow, along with their purchasing power as rural inflation declined.

But India has also implemented good policies, which allowed it to take advantage of the external shocks. The government took advantage of declining oil prices to eliminate fuel subsidies and hike taxes on carbon-emitting petroleum products, a win for the environment and a win for the exchequer.

With the additional resources, the government stepped up infrastructure spending, even as it was also sharing more revenues with states as a result of the 14th finance commission.
In FY17, besides agriculture, growth was also supported by the implementation of the 7th pay commission. Pay hikes for civil servants was accomplished without increasing the fiscal deficit as revenue collections improved, partly thanks to demonetization.
Regarding agriculture, while a good monsoon is still a boon to India’s large rural economy, moderate food inflation over two years of inadequate rains suggests India is becoming less rain-dependent, partly thanks to better management of food stocks and pricing policies, and partly due to improved irrigation (although in this particular area, the clear benefits of higher agricultural production may be offset by over-exploitation of groundwater).
Cognizant that good luck may run out, the Government has been implementing structural reforms to create sustainable growth.
In particular, the implementation of the Goods and Services Tax will contribute to more efficient domestic trade while having little impact on equity – a significant accomplishment given the regressive nature of consumption taxes.
These reforms will be critical to a pickup in private investment, which remains elusive but is the key to faster and sustainable economic growth.
Fixed investment decelerated significantly in FY17 despite higher infrastructure spending by the center and states, suggesting muted or negative growth in private investments in new factories and machines.
Decisively resolving the NPA challenge of public sector banks will be critical to allow private investors to take advantage of the more efficient post-GST environment to expand capacity and tap into new (state) markets.
In our recently-released India Development Update we discuss these short- and medium-term economic trends and also highlight a critical pillar of a sustained acceleration of GDP growth in India: increasing women’s participation in the labor market.

This opinion piece was originally published in the Times of India on 2nd June, 2017. 


Frederico Gil Sander

Practice Manager, Global Macroeconomics and Debt

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