The central government policy of handling the economy has been in discussion since the Reserve Bank of India reported that around 99.3 per cent of the demonetized currency found its way back to the banking system. The pains of demonetization again became fresh as the Narendra Modi-led government was slammed yet again for the aftermaths of the note-ban saga.
While the Opposition got big fodder in the form of the RBI report to tag the BJP government as ‘bad managers of the Indian economy’; the recent GDP growth report comes as a dampener for the slam-bang force against the government.
The latest GDP figures came as a big boost for the government as it highlights an impressive performance of our economy. The figures showed the GDP growth touching the two-year high mark of 8.2 per cent leaving countries like China behind. And, it was higher than what most analysts had predicted.
It was only in the Q4 of 2016 where we managed to have a GDP growth rate of 9.27 per cent. This impressive GDP figure is enough to show that ‘Modinomics’ was not that bad as claimed by his counterparts.
But the question which arises is that how we achieved this new benchmark despite the claims that GST and demonetization played negative for the economic health? The key factor was private consumption in our economy which stands at 8.6 per cent in the Q1 of 2018-19 whereas in Q1 of 2017-18, it was 6.7 per cent. It clearly shows that there has been a significant surge. The increase in private consumption is the result of few government reforms such as increase in MSP (minimum support price) and this increase in MSP has helped to increase the income level of the rural economy as the farmers were assured of increased income.
Secondly, the recommendations of pay commission and HRA revision also helped to increase the income levels of the formal economy. Very often the government was questioned over the job creation but this increased GDP has been achieved after a significant job creation in the sectors like manufacturing and construction and this has resulted in generation of more income.
One thing which seems common in all these factors is that there is an increase in the income of the household in the economy which further contributed to GDP. Whenever we see an increase in household income, the aggregate demand swings upward due to increase in the level of consumption. The increased consumption and demand resulted in more production which helps in increasing the output level contributing to the GDP.
After demonetization and GST, the manufacturing sector was considered as the most effected but the recent figures also make this perception wrong as the manufacturing sector growth stood at 13.5 per cent and the construction sector surged at 8.7 per cent. This increase in manufacturing and construction sector resulted an increase in job opportunities which also later pushed the household income at the right place strengthening the GDP growth. The increase in manufacturing and construction sector directly pushed a good production level which helped in boosting economy.
Another good and positive news was from the rural farm sector which showed an increase in the figures as the government faced a lot of protest in the past from the farmers. This sector stood at 5.3 per cent in the Q1 of 2018-19 in comparison to the 3 per cent in the Q1 of 2017-18. It is a 2.3 per cent point rise in the growth of this sector which was important to lead a balanced economy and again the contributing factor was the MSP reform introduced by the government. The MSP by the government brought more investment in this sector resulting in more production.
The government also spent a significant portion in public spending like infrastructure which increased the production level making GDP stronger. More public spending will push for more economic growth.
The much criticized structural reforms like GST also helped in boosting the economy. With the introduction of GST, the tax base of the government increased which accumulated more revenue for the government. With more revenue, the government invested more in public expenditures. The ease of doing business, liberalisation of FDI, banking sector reforms played a crucial role in increasing the investments.
Despite of external factors like higher crude oil prices, trade wars, weakening rupee, the higher growth rate has been achieved by some smart policies of the government. But maintaining the same higher economic growth will be a bumpy ride due to some concerns like fiscal deficit and core sector growth. The high economic growth resulted from good public expenditure but this expenditure has increased the fiscal deficit because it was more from borrowings less from revenue generated. The increased borrowings will result in more fiscal deficit which will push for a high interest cost and it will also have an impact on our forex reserve. The decrease in forex reserve is also among one of the reasons behind devaluation of rupee.
One more concern is the core sector growth which is declining; in July the growth in this sector was recorded 6.6 per cent whereas in earlier months it was around 7.2 per cent. In the long run, the fiscal deficit can play a negative role in the economy and hence to continue with the same or even higher growth, the private investments needs to be encouraged which will help in decreasing the government expenditure in making capital by putting these investments into the picture.
Putting the ‘Modinomics’ more smartly can eventually help the nation to reach some extraordinary benchmarks in the economic front.
(Views expressed by the author are his own. The News Mill has not independently verified the facts and figures mentioned in the article)