The Indian economy is experiencing
its own version of double-dip slowdown. After reaching 9+ percent growth in GDP
in 2006 the curve seemed to have reached a plateau, with 9.6% in 2007 and 9.3%
in 2008 – the year world’s fourth largest global financial services firm, the
Lehman Brothers, went bust sending the western economies into a tailspin that
had a rather disastrous effect on the rest of the world. In 2009 the growth
rate of India’s GDP dipped further to 6.7% confirming the worst fears of
various experts that the economy was all set to tumble down further.
Fortunately, things looked up a bit when the GDP grew by 8.4% in 2010 as well
as 2011. However, the economy seems to have hit the second dip in the financial
year ending 2012 with the Central Statistical Office’s estimates indicating a
sub-7% growth (6.9%, according most of them although FM Pranab Mukherjee says
that the estimates may be revised upwards after actual data is received).
Indeed, there is every reason to
worry about the manner in which the economy has performed so far and the not-so-bright
prospects during the next year, and beyond, with predictions hovering over 7 to
7.5%. We were repeatedly reassured by the PM, the FM and other high officials
in the Planning Commission and Finance Ministry that the economy was on its way
to the above 9% growth trajectory. This has not happened for reasons not
entirely beyond the government’s control. In fact, the recent excuses that the
economic slowdown is due to the recession in the west do not hold much water
for the simple reason that various domestic factors – especially the government
(in)decisions at the highest levels – have played far more ruinous roles;
witness the 2G scam and even the Vedanta factor that have certainly had adverse
impact upon the international sentiment vis-à-vis investments in India. But
there are far less glamorous, but extremely potent, factors too that have
shoved the economy away from its high growth trajectory.
In order to check high inflation the
Reserve Bank of India was forced to resort to fiscal measures; it had to raise
policy rates 13 times between March 2010 and October 2011, which resulted in
the increase in the cost of capital that has hurt private consumption, and
adversely affected investments in various sectors of the economy. All these have
led to a deceleration in gross fixed capital formation (GFCF). According to the
CSO data, the GFCF grew by only 3.5% in the first six months of 2011-12,
compared with 10.7 per cent in the corresponding period of 2010-11. It has been
the experience that if the GFCF fall by 1% the potential GDP output declines by
.02%.
Capital formation is vital not
just for the growth of big business houses but also for increase in production
of goods and services by the medium and small scale business enterprises. The
government has not been very imaginative in its policies to harness, sustain
and employ the domestic resources for capital formation. For instance, it needs
to be recognized that India’s household sector has been contributing
substantially to the economy’s growth. The Gross Domestic Savings, at 32%, are
among the highest in the world. 70% of these savings come from the household
sector. These could have been used more efficiently to develop
capital-formation instruments and structures. Let us not forget that the
media-hyped Foreign Direct Investments have never crossed the 5% mark of the
GDS; this, when incentives to the household sector have been measly when
compared to those given to the FDI sector. Moreover, domestic savings are
seldom mobilized for optimum use in the industrial and tertiary sectors.
It goes without saying that there
is a need for focusing on mining, manufacturing and agriculture sectors, where
new investments are required. There is also a need for eschewing the Jayaram
Ramesh brand of environmentalism that will only scare away both existing and
potential investors in the mining sector which urgently requires huge
investments in technology and capital goods. As for the agriculture sector the
government’s indecision on the land use policy has had a telling effect on a
clear-cut roadmap to development. Even the food grains distribution system
remains more or less moribund thanks to any decisive initiative on the
government’s part. Here it would be pertinent to point out that while NREGA
type of schemes may generate employment for the vast unskilled and semi-skilled
labour force in the rural areas it would have better served the country’s interests
if enduring rural infrastructure was built up in the bargain. We are talking
not just of making roads, bunds and canals but also low cost technological
inputs in terms of various agricultural implements/machines that would be of
use to small and marginal farmers in increasing agricultural production.
Talking of small and marginal farmer, the policy makers are increasingly
looking upon them as disposables. New wisdom is focusing on reconsolidation of
land holdings through corporate interventions. While this may create a new set
of agro-industrial behemoths it is not clear how the farmers displaced by them
would be re-employed elsewhere. Wouldn’t it lead to avoidable social stress? It
would be much better if suitable policies and structures are formulated that
would make even marginal land holdings viable with the help on new
technological inputs or diverting the land to more profitable uses.
As for the manufacturing sector,
the problem lies largely with infrastructure development at the “grassroots”
level. While big corporate houses have had to face comparatively less obstacles
on this score it is the non-corporate manufacturing sector that is facing
formidable odds when it comes to availability of power, storage, distribution
and other services that are so vital for its growth. For all this imaginative
economic policies ought to be formulated and executed.
The government needs to depend less
upon tight fiscal measures that discourage consumption. The decrease in
inflation through such measures is always unnatural and harmful to the growth
of an economy. We are already seeing how production of various goods and
services is being reined in, with adverse effects on the GDP growth. In the
long term it would be much wiser to manage the supply side by encouraging
production in order to meet the growing demand. Rudimentary economics tells us
that when supply of goods and services outstrips, or at least matches, demand
prices tend to fall/stabilize. Such a situation will enable the Indian economy
to grow without the ill effects of inflation.
Randeep Wadehra
Published in the Daily Post dated February 11, 2012
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