2015:Year of low inflation & less than projected growth

Krishnanand Tripathi

Indian currency

India’s economic growth in 2015 was described as the only ‘bright spot’ in the world by IMF Chief Christine Lagarde. India grew faster than its giant neighbour China. In the past few decades, China had been one of the major drivers of world economic growth but in 2015 the Chinese economy faltered due to massive stock markets crashes. In the months of July and August, Chinese stocks crashed and the economy’s industrial production and exports also shrunk.

India topped the foreign direct investment list in greenfield projects during the first six months of 2015 dislodging both China and the USA. Wholesale inflation as measured by WPI was in the negative territory throughout the year and retail prices as measured by Consumer Price Index were also below 6%.

Indian economy really picked up in the second quarter (July-September) of this financial year to clock a growth of 7.4% after growing at a rate of 7% in the first quarter. Interestingly, in the same period Chinese economy decelerated to 6.9%.

But a weak monsoon, a drought-like situation in some parts and floods in other parts coupled with weak signals from advanced economies and delayed reforms eventually weighed down the growth rate to below 8%, the goal set by the new government for this fiscal.

But Finance Minister Arun Jaitley maintained that the growth rate of 7 to 7.5% was quite good despite global slowdown and adversities and would improve further in the latter part of 2015.

“As the year ends, I look back with a sense of great satisfaction,” said Finance Minister Arun Jaitley as it was under his his stewardship India became the biggest recipient of foreign direct investment in greenfield projects and also significantly improved its ranking in terms of ease of doing business by 12 notches. The country also fared well in collection of taxes.

Jaitley also dismissed the criticism about the economy not really ‘taking off’.

“Cynicism is a way of life in India. You can question any other data but you cannot question the actual rise of revenue and the actual rise of revenue is showing that the economy is doing better,” Jaitley contended.

Policy makers could also take credit on another front as India was able to firmly keep the inflation under control in 2015 largely on account of a sharp reduction in crude and commodity prices.

Wholesale inflation which was measured -0.39% in January touched a record low of over -5% during June-July period before hardening towards the year end. As per the latest data, WPI was hovering around -2% in the month of November.

Two other important indices to measure retail prices and food inflation were also under the glide path set by Urjit Patel Committee of Reserve Bank which had set the target of bringing down the CPI below 6% by January 2016 and below 4% by January 2018.

In November, the combined Consumer Price Index for rural and urban workers touched 5.4% the highest since October 2014. The consumer food price index was at 6%, the highest since October 2014. High food prices contributed to this driven by a spike in seasonal vegetables like onion and tomato, fruits and protein items.

Two consecutive deficient monsoons in a row sharply pushed up retail prices of Tur or Arhar dal to record levels of 200 per kilogram in October, forcing the government to resort to imports and carry out raids against hoarders.

Low inflation also helped India’s conservative central bank – Reserve Bank of India to cut down the short term benchmark interest rates four times in 2015. Repo rate, the rate at which banks borrow short term funds from Reserve Bank, has been cut four times this year, the total reduction of 1.25% brought it down to 6.75% from a high of 8% during the start of the year.

However, the hardening of CPI towards the end of 2015 prompted the Reserve Bank to hold rates in the last policy statement announced in December 2015.

“We will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to five percent by March 2017,” RBI Governor Raghuram Rajan had said on 1st of December while announcing the last bimonthly monetary policy statement of 2015.

Rajan has often defied the calls from the industry and the government for rate cuts to boost economic growth in order to keep inflation under check.

But it’s not been an entirely rosy picture. Key economic reforms, particularly the biggest overhaul of its complex, multi layered and fractured indirect tax system to introduce a common Goods and Services Tax remained a non-starter.

Jaitley said that India had responded well to the challenges posed by the slowdown in global economy. However, he admitted that there were areas in which the government would have to respond faster.

He also listed the government priorities for the new year. ” I would like to concentrate essentially on three things — more money for physical infrastructure, more money on social infrastructure and lastly more money on irrigation because that is a neglected sector, ” said Jaitley.

On the positive side: India improved its ease of doing business ranking by 12 notches to reach the 130th spot in global ranking.

India also got foreign direct investment of 30 billion dollars as greenfield foreign direct investment between January and June as per an assessment carried out by the Financial Times, a top global business publication. China only managed 27 billion dollars and the USA 26 billion dollars during that period.

Indian economy showed mixed results in 2015 but the year finally ended on a somber note as the lack of political consensus or rather political one-upmanship thwarted the passage of the 122nd Constitutional Amendment Bill in the Rajya Sabha. This failed to implement GST regime across the country from the 1st of April 2016. The new tax regime is essential as it will turn India into a common market and lower the cost of compliance and increase the tax base. The reform is expected to significantly improve the ease of doing business in the country that could lead to increase in GDP growth by one to two per cent. However, the political class’ inability to put their differences behind and pass the law in the Rajya Sabha in the Winter Session dampened the business spirit and investor sentiment.