Biggest clog in the economic growth wheel is the muted private investments. Though there’s a pick up in the fixed gross capital formation, this is not enough to support the 7 per cent plus growth estimated by finance minister Arun Jaitley in 2017-18 budget speech.
As per government’s advance estimates, gross fixed capital formation, an indicator for private investments, was estimated to grow at 29 per cent as against 29.5 per cent in the last fiscal.
While the initial slip in the first six months seems to be on recovery mode, there’s no reason why the private investors should not have ridden piggyback on public investments to realise the 7.1 per cent growth during the entire financial year.
Slowdown in private investments could well turnout to be a major cause for scaled down GDP growth at 6.5 per cent in 2017-18. Gross Value Addition (GVA), a key indicator for robustness in growth, is expected to touch 6.1 per cent as against 6.6 per cent reported for 2016-17.
Demonetisation of high value currencies and initial glitches in GST implementation has often been cited as the biggest demons that worked against growth. More importantly, private investors, especially the domestic companies, have not come to terms with new ways of the Narendra Modi’s regime. Up until now, companies have been currying favour with the powers that be. They have taken for granted that greasing one’s palms was the only way to get things moving in this country. They are yet reconcile to the fact that they are in a transparent environment where only their hard work counts and nothing else.
Hence, even if there was late pick up in fixed gross capital formation, manufacturing growth may not cross the very modest 4.6 per cent mark as against 7.9 per cent reported in the last fiscal. The positive part was that if pick up in investments were sustained, it would contribute handsomely to next year’s growth.
Muted performance in rural and farm sectors would definitely figure high up in the factors that may lead to lower than initially estimated GDP growth. Gross Value addition of 2.1 per cent in agriculture, forestry and fishing estimated for this fiscal is less than half of 4.9 per cent posted in 2016-17. Historically, whenever the agriculture sector did not keep up, it has had adverse impact on economic performance. This time round, it may not be different.
Jaitley will have to come up with big ideas to revive the rural economy. Subsidies and farm loans cannot sustain the technology driven agriculture sector. Unless the market related risks of farmers owing to price volatility is not taken care of, agriculture sector cannot deliver its full potential.
Given that government at centre or states do not have enough resources to deal with subsidies or offer loan waivers, the strategy to revive agriculture growth will have to be distinctly different.
One way, perhaps, was to set up a dedicated market risk fund to provide relief for farmers that suffer huge losses in the event of prices collapse. RBI, union government, states, Nabard and banks contribution to this fund would actually stimulate a new market linking mechanism. Returns from onward investment from this fund could actually be used for dealing with farmers market related risks.
In fact, it could be a standing mechanism that may eventually free the central government and states from forking out huge funds towards subsidies. Even interest subventions based lending can be phased out. Eventually, the target should be to create at least Rs 10 lakh crore fund. Even if 20 per cent subsidy and interest concessions on lending to farm sector were phased out each year, the dedicated fund along with robust farm infrastructure can provide a base for healthy farm growth.
With certainty in agriculture performance, economy is bound to be on high growth trajectory.