Mint Primer: Will the poll give India’s economy another boost?
Summary
- The markets have surged due to the exit poll results. Will a resounding victory aid India's economy too?
India is the world’s fastest growing large economy. But the economy needs a recharge to sustain this dream run. The next government has to undertake the next generation of reforms to accelerate growth. Mint explains the need for this booster shot.
Is the verdict critical for the economy?
The economy made a strong recovery post-pandemic, and is poised for sustained and rapid growth. For that to happen, it is important to have a stable government with a strong mandate—one that can bring about policy changes and unleash the next generation of reforms needed to maintain this pace of growth. Also, policy continuity is critical to attract foreign direct investments and drive industrial growth. The need to balance welfare and fiscal discipline is also important. Excessive populism could derail fiscal consolidation and undermine economic growth.
Also read: Stocks lift off as saffron storm brews in market crystal ball
Isn’t the economy doing well already?
Yes, it is. India is the fastest growing large economy. In FY24, it posted an enviable GDP (gross domestic product) growth of 8.2%. Fuelled by a strong manufacturing and stable services sector, the four quarters of the financial year just gone by saw a scorching pace of 8.2%, 8.1%, 8.6% and 7.8%, respectively, surprising economists each time. But this dream run is unlikely to continue in FY25. Because of strong headwinds and a higher base effect, economists expect FY25 GDP growth to decline to 6.5%. Another wave of reforms is needed to catalyze the economy and sustain the present growth rate.
What’s been the record of coalition governments?
The 1991-96 Narasimha Rao government that ended the Licence Raj and liberalized the economy was in minority. The path-breaking reforms happened even as India was facing a major payment crisis. The 1999-2004 NDA and 2004-14 UPA governments were minority/coalition arrangements. They, too, ushered in reforms over time but on a smaller scale.
Also read: GDP blitzkrieg in FY24 keeps India ahead of its major-economy peers
What sort of reforms are needed now?
Next-generation reforms are not easy or palatable—hence the need for a strong mandate. Labour, land and agricultural laws are obsolete and need a revamp. The goods and services tax (GST) has stabilized. But it is time to make it simpler as was intended originally and at the same time bring in sectors like petroleum that were left out of it. Direct taxes also need a fresh look. Most importantly, it is time for the Centre to aggressively incentivize states to embrace reforms—land reforms among them.
What will be the new govt’s priorities?
Though GDP numbers look good, a closer look reveals a worrying trend. Private investment refuses to recover despite a reduction in corporate tax rates and the government is spending a lot to pump-prime investments. Gross fixed capital formation, a measure of investment, grew by just 6.5% in Q4. Consumption grew just 4% in FY24, the lowest in 20 years amid a K-shaped recovery. Exports need a push through more bilateral trade deals, and all these must hopefully deliver job-led growth.
