Highs and lows are typical in a resilient economy, but the lows reached over the past fortnight may pose an unprecedented challenge
The Indian psyche has an essential ingredient which ends up often in forewarning a doomsday. We have seen many Ashtagrahis and predicted many an Armageddon. One such prediction is the likely collapse of the economy.
The Indian economy is surely undergoing a testing phase with the current slowdown in its GDP growth. The global financial crisis has its implications but the slowdown is rather domestically crafted aided by policy failures. Even though I would say that our reaction to the event is more exaggerated than it deserves. The phenomenon is common across many economies in the world and India could not be an exception. Besides, unlike many countries, India has its own structural issues that are quite difficult to negotiate. India is a multicultural multifaceted country and that is reflected truly in its economy.
First, the slowdown has to be viewed on the background of the past two decades. We have witnessed euphoria of reaching a double digit growth rate in the near future and every one responsibly connected with the policy endorsed the ambition. It is not bad to have a big target but the problems should have been viewed in proper perspective. Second, it is necessary to analyse the genesis of this happening and contextualising it. Third, the world economy is confronting serious blockades and however small, the tremors of this will undoubtedly be felt in India. last, with all these it will be necessary to ask if we have tried to set right the house or are we still lethargic on policy frontIJ It is well-known that since last four decades basics of Indian economy and the structure of the economy is changing rapidly and there are efforts to make the economy more market friendly. However, precious little is done in the market reforms across sectors. The share of GDP to agriculture is declining and that of the services sector is increasing fast. The share of industrial sector to GDP has been increasing but the change is quite slow. In a nutshell, the unstable sector is increasing faster in its importance than the stable contributors with significant implications for employment. It is essential to understand that any growth that comes through the Services sector cannot be sustained for long. In that case, the industrial sector should have increased in its contribution. Instead, we see that the slowdown in the industrial sector has been perpetual and very little has been done to reverse this trend. Surprisingly, the contribution of agricultural sector to the GDP is quite low but still the repercussions of the tremors in agriculture are felt across the sectors.
It is never that in a bad monsoon year the economy could do well with higher contributions from other sectors. The absence of a well balanced structural policy is therefore a major weakness and that threatens the growth story.
Besides these, the Indian economy has got to deal with the issues of structural balances across sectors. The largest share of its workforce is still in agriculture as also the density of
poverty in rural areas is much higher. Domestic savings have also gone down and the RBI policies could not help much. Infrastructure bottlenecks, skills mismatch and market
imperfections also added to the injury. All these were ignited by the sluggish trends in investment both from domestic and international sources. Unless investment revives, the
possibility of a turnaround is dim. The supply constraints in energy and the pricing of natural resources (coal) also played a critical role.
All economies go through alternate phases of growth and stagnation. The historical fact remains that India’s economy has survived several testing times over the past 65 years. The current slowdown can be partly due to this cyclical behaviour but at the same time it is erroneous to expect a continued high growth rate for a decade or so. The mathematics of growth does not permit double digit growth, as it is infeasible with the operating constraints like savings rates, slow domestic investment, trade deficits, non-proactive trade, stagnation in productivity and above all dependence on the monsoon. With all these constraints operating in tandem, how can one expect a sustained high growthIJ Therefore, there is nothing surprising in the current phase and we may overcome this soon provided policy interventions are set in.On the fiscal front all is not well. Successive commitments by the Finance Minister on fiscal consolidation could not be honoured because of populist budgetary demands. The reorientation of policies towards better revenue generation, especially through indirect taxes and also the promised disinvestments could have helped to boost investment. The Global Integrated Monetary and Fiscal Model (GIMF) indicated a slowdown by 2.5 per cent age points over 2007-11. Tax revenues were also affected by the slowdown and expenditure overshot on account of petroleum subsidies. As a result the FRBM benchmark of attaining a controlled level in terms of non-debt receipts could not be reached. The last two budgets made a little headway to the consolidation but the scheme of direct transfers may control the pilferages in subsidies as well as impact positively the welfare.
The supply side factors are mainly held responsible but then the composition of the structure of demand also has been at a critical point. Inflation has slowed down and this year’s monsoon may push it further under control. At the same time one cannot totally discount the role of the strict monetary measures on the part of RBI. FDI has been permitted in some new sectors and a Cabinet Committee on Investment has been set up under the PM but all that failed to attract the needed money. Being the second largest economy with PPP based infrastructure projects, it can be expected that domestic investors are attracted to this sector. One of the major faults is the sharply increasing trade deficit on account of uneconomic imports. Our imports are currently dominated by consumer goods and precious metals that do little to boost the growth. The high imports of precious metals were reported to be draining the forex and the outpour could not be plugged in time.
Finally the reform clock has either slowed down or lost its pace as planned due to populist budgets on one hand and lack of policy vision on the other. No economic crisis emerges without prior warnings. Here also the writing on the wall is very bold and clear. Now the Rupee has collapsed to an all time low and the mirror image in the stock market is well visible. India’s external vulnerability has increased sharply and so have emerged quite a few domestic issues. Inflation has slowed down but should not pick up again on the fiscal side. We need to be watching both the revenue generation efforts and expenditure control. An atmosphere of confidence has to be created for both domestic and foreign investors so that we may have a sustained flow of investment.
I would say that the battle is not lost but signs of the breaches in the ranks and files are visible. We are not at the end of the story and still have a chance to rewrite it. And that is called Indian resilience to bounce back.
(The writer is a Bangalore-based economist)