One year of Modi: the real challenge in the economy

As the Modi government completes one year in office, it has been hit by several adverse developments: a firming up of oil prices (although the price of $60 is built into the official assumptions), a decline in the nominal exchange rate (considered beneficial by many given that the real rate had strengthened), a sell-off by FIIs (following the application of MAT to their profits) and widespread agrarian distress.

But these factors should have been offset, in popular perception, by the prospect of a return to an 8% growth rate and a decline in the inflation rate. Why has this not happened? One is that people, perhaps, don't see the acceleration in growth as owing to the NDA government's policies- it's a gift from the CSO which has revised GDP growth rates upwards after moving the base year forward to 2011-12.

A second reason is that 8% growth doesn't generate enough jobs, given the economic model we are following. To make an impact on job creation, we need a growth rate of 9-10%. And that's hard to achieve when the global environment in weak, corporates are mired in debt and public sector banks lack capital. India faces what the Economic Survey calls a 'balance sheet crisis with Indian characteristics.' Such a crisis is seldom resolved in a hurry and it won't be resolved just by pushing through a set of reforms. The real challenge for the government is whether it should try to accelerate growth in such conditions or try to tweak the economic model so that growth results in better outcomes for more people.

More in my article in the newly started news and analysis portal, The Wire.