The evolution of India’s economic policies since May 2014 was constrained by certain initial challenges and a combination of global economic headwinds and tailwinds.
The National Democratic Alliance (NDA) government attempted wide-ranging policy changes, but met with mixed success, despite holding considerable promise. There was clearly a supply-side focus with outcomes expected to show benefits in the medium-to-long term.
In 2014, the Indian economy suffered from high levels of inflation, and fiscal and current account deficits relative to GDP (gross domestic product). In the pre-NDA years of FY13 and FY14, Consumer Price Index (CPI)-based inflation was in the range of 8-11%. From the high levels of 4.8% and 4.9% of GDP in FY13, the current account deficit and centre’s fiscal deficit-GDP ratios were still high when the NDA government took charge.
Global crude oil prices averaged close to $103 a barrel in FY13 and FY14, and were still high at $83 a barrel in FY15. The investment climate was weak and the government’s decision-making suffered from policy paralysis.
Key policy initiatives: thrust on supply side
The NDA government introduced a multipronged policy thrust. A new monetary policy framework was brought in place after institutionalizing a CPI inflation policy target of 4% on an average. A fiscal consolidation path aimed at containing the centre’s fiscal deficit at 3% of GDP was embarked upon. Two key policy shifts, demonetization—aimed primarily at containing generation of black money—and the goods and services tax were attempted. Both involved short-term costs, but hold a tangible promise for long-term gains.
Other key policy initiatives include Make in India, Smart Cities Mission, Digital India and Startup India. All of these aim to improve productivity in the economy. Two early policy successes related to market determination of mineral and spectrum prices. The power sector further benefited from the UDAY (Ujwal Discom Assurance Yojana) scheme. For the real estate and banking sectors, the regulatory framework was changed. Additional fiscal space was created by better targeting of subsidies, while expansion for rail and road projects was prioritized. A number of welfare-improving, low-fiscal cost schemes were designed, including Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri Suraksha Bima Yojana and, more recently, Ayushman Bharat.
Challenges and prospects: promise of sustained growth
Rising global crude oil prices pose an immediate challenge to India’s macro balances. The 2019 general election may also involve some fiscal costs. The supply-side thrust would increase productivity of labour and capital, uplifting growth prospects on a sustained basis. The employment-creating potential of growth will have to be further emphasized in the formulation of forthcoming policies. Overall growth prospects appear to be benign, with India slated to lead global growth among major economies at 7.4% in FY19 and 7.8% in FY20, as projected by the International Monetary Fund.
D.K. Srivastava is chief policy adviser at EY India. The views expressed are personal.