A War Abroad, A Steady Economy At Home | Opinion

Between April and June this year, the world gave India every reason to slow down. There was a war in West Asia. Ships carrying oil could barely pass through the Strait of Hormuz. Crude oil, which India buys from abroad for 85 out of every 100 barrels it uses, touched $120 a barrel in March. The rupee fell to its lowest ever. America put new tariffs on Indian goods.

Instead, India’s economy grew 7.8 per cent in those three months. The Reserve Bank had expected 7 per cent. The United States grew 1.5 per cent in the same period, Britain 0.4 per cent and China 4.3 per cent. India was again the fastest-growing large economy in the world, and this time in the middle of a storm.

What is driving this growth? The simplest answer is that almost everything grew at once. Factories produced 9.2 per cent more than a year ago, the best in three quarters. Construction grew 7.7 per cent. Services, which means everything from banks and software companies to shops, transport and hotels, grew 10 per cent. Farm output grew 3.6 per cent even though the monsoon arrived late.

Behind these numbers are three things ordinary people can recognise. First, households kept spending. Sales of cars, two-wheelers and tractors rose sharply, in cities and in villages. Private spending grew 7.1 per cent. Second, businesses kept investing. Money spent on new factories, machines, roads and buildings grew nearly 12 per cent, the highest in the new GDP series, and investment is now 34 out of every 100 rupees of national income, up from 31 a year ago.

Third, exports grew 12 per cent despite the tariffs, led by engineering goods, electronics and chemicals. Listed companies reported sales and profits up nearly 20 per cent, and bank lending is growing 19 per cent.

None of this happened by chance. The government and the Reserve Bank made choices that are now paying off. When oil prices shot up, petrol and diesel prices at the pump were not raised. Petrol has stayed at about Rs 108 a litre and diesel at about Rs 98. The government took the loss on its own books so that families and truckers did not have to. That is the main reason inflation stayed at 4.45 per cent in July when oil was up 58 per cent.

Last year’s Budget cut income tax and the GST Council cut rates on many everyday goods. That put money in people’s pockets at exactly the moment oil was taking it away. Years of government spending on highways, railways and power lines built the base on which private companies are now building data centres, power plants and factories. The Centre’s own capital spending grew 24 per cent in the quarter.

The Reserve Bank did its part. When foreign investors pulled money out and the rupee fell, it opened a special scheme for Indians abroad to deposit dollars in Indian banks. Over $65 billion came in within three months, and that stopped the rupee from falling further.

India’s foreign exchange reserves are $717 billion, enough to pay for 11 months of imports. Government godowns hold rice at nearly five times the required buffer and wheat at nearly twice, which is why grain prices stayed calm while the rains were weak.

That is what a well-run economy looks like in a crisis. The road ahead is not smooth, though. Four things need watching if India wants an even better number next year.

The first is oil. Crude is still near $90 a barrel, and the Chief Economic Adviser has said it is unlikely to fall much. Every month that pump prices are held, the government’s bill grows. That bill has to be paid by raising fuel prices slowly when crude eases or by cutting spending elsewhere.

The second is the monsoon. Rains recovered in July, and sowing reached 92 per cent of normal, but the weather office expects a weak August and September. Grain is safe because of the government stocks. Pulses, vegetables, cooking oil, eggs and meat are not, and their prices are already rising. If food prices climb, the Reserve Bank may have to raise interest rates, which would make home and car loans costlier.

The third is the rupee and America’s tariffs. The rupee is near 96 to the dollar. The extra 10 per cent American tariff from July spares phones, medicines and petroleum products, but garments, leather, gems and jewellery are already losing sales. These industries employ the most people and need cheaper export credit and quick trade deals with Europe and Britain.

The fourth is jobs. Growth of 7.8 per cent should mean more work, but the unemployment rate rose slightly in the June quarter, mostly in villages. Private companies are investing again, and that has to turn into hiring. The tax cuts that lifted spending last year will fade by the end of this year. Private investment and new jobs have to take their place. India has shown it can grow through a war. The next test is to grow after one.

(Note: The author is a public policy analyst.)