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How Modi govt can push GDP growth to 7%

May 18, 2014 13:25 IST

Bold reforms and prudent monetary and fiscal policies by the incoming Narendra Modi government will help the economy to grow at 6.5-7 percent, says a report.

According to Crisil, the decisive electoral mandate has created the best environment in a long time to bite the bullet on government finances.

Registering their best-ever showing, BJP has won 282 seats in the Lok Sabha polls, becoming the first party after 1984 election to have majority in the Lower House. Its leader Narendra Modi would be taking over as the Prime Minister soon.

The rating agency has listed out five important things -- taming inflation, fiscal consolidation, improving asset quality at banks and their recapitalisation, encouraging debt markets and boosting manufacturing and employment -- which the new government has to do on a priority basis.

"Such an agenda will improve the country's competitive efficiencies and pave the way for its re-entry into the orbit of 6.5-7 percent GDP growth in the years to come," Crisil's chief economist Dharmakirti Joshi said.

The report said for taming inflation the new government will require to have a better coordination between monetary and fiscal policies and to take steps such as dismantling the APMC Act for reduction of food inflation.

There is also a need to bring in a sea-change in storage and distribution capacities for fruits and vegetables, particularly important in the current year in view of the rising risks of monsoon failure spurred by the El Nino, it added.

For fiscal consolidation, Crisil believes this will entail reduction in subsidies and curbing expenditure and ensuring that the money spent on social welfare schemes creates durable assets than remain just cash handouts.

It is also critical to simultaneously introduce growth and revenue-enhancing measures such as clearing the long-delayed GST and improving tax compliance, the report said.

The rating agency said the country's corporate debt market needs to be fostered for growth to be sustainably funded.

"Banks alone cannot deliver the large amount of capital required to build out the country," the report said.

Steps to revive the manufacturing sector will be critical. Clarity on land acquisition, environmental clearances, better infrastructure, and labour law reforms - such as shifting its purview to the states, will be critical to improve the business climate and boost manufacturing, which is in its worst phase in the last two decades, Crisil added.

The manufacturing engine, represented in large measure by micro, small and medium enterprises, needs to do well if its fast-multiplying workforce has to find gainful employment the report said.

"The lowest-hanging fruits are fast-tracking of projects in pipeline and resolving iron ore and coal mining issues. This will improve the efficiency of capital that is now stuck, pave the way for better returns on investment, create jobs, lift income growth and spur private consumption demand," Crisil's chief executive and managing director Roopa Kudva said.

Crisil, however, said the new government's to-do list to revive the economy is a long one, but unfortunately, there is limited ability to use growth-supportive monetary and fiscal policies. The report said typically, monetary and fiscal instruments (increase in government spending) are used to prop up a sagging economy in the short run.

"However, the country has run out of such countercyclical policy ammunition as its inflation and deficits remain high and, in fact, need to be trimmed," it added. 

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