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Executive summary

Many of the repairs and reforms initiated by the Narendra Modi-led National Democratic Alliance (NDA) government continue to be work in progress and need relentless execution focus. 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 in the medium to long term only. Key repairs and reforms relate to the power sector, the Insolvency & Bankruptcy Code, banking and taxation. These have already been covered in our recent Outlook Series report, ‘Fours of growth’, published in March 2018 (https://www.crisil.com/en/home/our-analysis/reports/2018/02/crisils-india-outlook-2018-the-fours-of-growth.html)

So far, low oil prices and distance from elections helped the government pursue a prudent policy stance. But with the situation now reversing, will the government be able to continue its focus on the ‘trend’ than the ‘cycle’?

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.

For instance, to address rural distress, there is always the temptation to fall back on populist measures such as farm loan waivers. This not only creates fiscal stress, it is not very effective either. The recent promise to waive off farm loans in Karnataka is a rather disturbing sign and the waiver size could blow up if more states were to follow suit. That would strain the already stretched fiscal position of states.

For durable gains, structural issues need to be addressed through reforms. While Modi government has chosen trend over cycle for most part of its journey so far, it will face its real test this fiscal, when the reforms agenda is likely to face headwinds.

The past four years of the NDA government have been a mixed bag of good luck on oil, raft of reforms and repair, disruptions, and slower growth. That script could run some more, but with some alterations in the narrative.

At a general level, macroeconomic parameters have shown improvement and lower volatility. India’s gross domestic product (GDP) grew at an average 7.3% these four years, the fastest in BRICS (Brazil, Russia, India, China and South Africa), but slower than the 7.6% in the preceding decade. The slowdown became more pronounced in fiscal 2018 due to disruptions from demonetisation and implementation of the Goods and Services Tax (GST). Now the economy is bottoming out and edging towards its trend growth rate.

Retail inflation also declined because of softer food prices due to 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 the monetary and fiscal policy cautious.

Improving the twin deficits – fiscal and current account – has been another laurel, but some of it got reversed last fiscal.

Yet, despite better global competitiveness and ease of doing business rankings, and bettermacros and reforms, the business sentiment needle hasn’t moved in a material way.

Another aspect that’s been worrying is the surge in non-performing assets in banking. However, the transparent and time-bound process driven by National Company Law Tribunal (NCLT) offers hope. CRISIL is perticularly positive on the steel sector because of buoyant global prices and recovering domestic demand.

We expect 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. So far, even a pick-up in foreign direct investment hasn’t helped kickstart the private investment cycle.