The Narendra Modi-led National Democratic Alliance government’s efforts to ensure a well-oiled economy could be tested in its fifth year in office as multiple risks materialise, led by exogenous factors such as a runaway rise in global crude oil prices, CRISIL said in its report titled, ‘4 years through 6 lenses’, released today.

The report looks back at the four years of the Modi government as a mixed bag of good luck on oil and monsoon, a raft of reforms and repair, disruptions, and slowing growth.

Low oil prices and distance from elections helped the government pursue a prudent policy stance – choosing ‘trend’ over ‘cycle’, as it were.

Says Dharmakirti Joshi, Chief Economist, CRISIL Ltd, “In the past four years, there has been visible improvement in most macro indicators. India’s gross domestic product (GDP) grew at an average 7.3% these four years, the fastest in BRICS, though slower than 7.6% in the preceding decade. Retail inflation declined because of softer food prices following bumper crop production and proactive steps from the government, sluggish demand conditions that kept core inflation low, and adoption of an inflation targeting system that kept monetary and fiscal policy cautious.”

The twin deficits – fiscal and current account –also improved, though some of the gains were reversed last fiscal.

However, a runaway rise in oil prices could stir the inflation scourge back to life and impact other macro indicators too. A back-of-the-envelope estimate shows every $10 per barrel increase in crude oil price can shore up India’s fiscal deficit by 8 basis points (bps) as a percentage of GDP and similarly the current account deficit by 40 bps, ceteris paribus.

Adding to the woes is the rupee’s depreciation versus the greenback, which increases the cost of imports, particularly of oil.

All this comes as rural distress is mounting, manufacturing is smarting, and the business sentiment needle hasn’t moved in a material way despite better global competitiveness and ease of doing business rankings, and better macros and reforms,. What’s more, non-performing assets in banking have surged.

The ‘4 years through 6 lenses’ report analyses the Modi government’s performance in the past four years using six lenses, which reflect the true structural health of the economy:

• Employment, where challenges persist mainly because construction and manufacturing, which generate the most employment among non-agriculture sectors, have underperformed
• Investments, where a decisive push to the investment cycle eludes despite all the facilitations, and private sector investments remain sluggish and unlikely to revive in a hurry
• Manufacturing, the share of which in GDP increased only 80 bps between fiscals 2015 and 2018 to 18%, making the ‘Make in India’ target of 25% by fiscal 2022 appear gargantuan as it would entail clocking a whopping 17.5% annual manufacturing growth from here
• Rural economy, which is beset with challenges such as slower agricultural growth, poor farm price realisation, slowdown in construction activity, and sluggish rural wage growth despite a raft of well-meaning measures in the past four years
• Financial inclusion and technology, where there has been major improvement thanks to the trinity of Jan Dhan, Aadhaar and mobile connections, though issues such as zero balance accounts, provision of financial services, and upgradation of digital infrastructure need to be addressed
• Taxation, where direct tax compliance has shown clear improvement in the past two years, following the income declaration scheme and demonetisation, and GST is seen speeding up both formalisation and tax compliance

Says Dipti Deshpande, Senior Economist, CRISIL Ltd, “There is very little fiscal and monetary room for countercyclical policies to boost growth and these would not be very effective either as most of the problems plaguing the economy – be it in manufacturing, exports, or agriculture/rural – are structural in nature and can only be addressed through reforms.”

CRISIL expects India’s GDP to grow at 7.5% in fiscal 2019, the fifth year of the Modi government.

Taking that number to 8% and sustaining it over the medium run would require a big lift through private investments and relentless implementation of reforms.

Many of the repairs and reforms initiated by the government remain work in progress. The government has avoided short-term push to growth using monetary and fiscal policies and most of the steps taken in the past four years will bear fruit only in the medium to long term.