PM Modi Showcases Growth, Inflation to Mark Anniversary, But Faces Roadblocks Ahead

In his celebration of his government’s achievements in its first year, Prime Minister Narendra Modi has particularly highlighted faster growth and lower inflation. But analysts are predicting tough days ahead on both counts for the government.

On Thursday, PM Modi tweeted:

 

Tej Gati, Aarthik Pragati. #SaalEkShuruaatAnekpic.twitter.com/2UWQ6ATnkR

— Narendra Modi (@narendramodi) May 28, 2015

 

Inflation has indeed fallen sharply, though a lot of credit for it should go to the crash in global commodity prices, analysts say. Retail inflation cooled to a four-month low of 4.87 per cent in April, while wholesale price inflation continues to be in the negative territory, indicating a contraction in prices.

Economic growth has also picked up as the GDP growth likely expanded at 7.4 per cent in 2014-15, up from 6.9 per cent a year ago (according to the new series).

But going ahead, say analysts, this is what the government will come up against:

1) A survey by industry body Assocham, published on Thursday, shows that prices of fruits have skyrocketed by 40-45 per cent, particularly in metros and major cities due to unseasonal rain over the last few months. Prices of vegetables such as brinjal, onions, cucumbers and tomatoes have also gone up, the survey found.

2) The uptick in fruit and vegetable prices comes at a time when economists are predicting higher inflation because of the likelihood of weak monsoon rains. Nearly 55-60 per cent of crops in India are dependent on monsoon rains for irrigation.

3) Higher inflation, ahead of assembly elections in Bihar, could have political implications. A victory in Bihar is crucial for the BJP to increase its numbers in the Rajya Sabha, where the government is in a minority. According to Bank of America Merrill Lynch, Bihar’s assembly polls will influence the government’s reforms agenda.

4) There’s also worry on the growth front. While headline GDP indicates growth, a number of parameters used to measure growth continue to disappoint. Corporate sales and industrial production are down; exports have fallen for five months in a row; output of cement and steel – a proxy for construction – has been extremely weak. Growth in bank credit in 2014-15 was the slowest in two decades. There’s a consensus that March quarter GDP, slated for release tomorrow, would show a dip as compared to December quarter.

5) The biggest worry for the government could be the possibility of deceleration in growth in the current fiscal. Finance Minister Arun Jaitley expects FY16 GDP growth to accelerate to 8 – 8.5 per cent, but economists are skeptical. Ritika Mankar Mukherjee, economist at Ambit Capital, told NDTV that GDP growth in FY16 will be slower than FY15 at around 7.1 per cent. Saugata Bhattacharya, chief economist of Axis Bank expects FY16 GDP to be in the same ballpark of FY15.

(With inputs from Reuters)