On Friday, India got further validation of the poor state of the economy. It was informed that the economy grew slower in the second quarter of this fiscal than the previous quarter. In some quarters, the information was interpreted as good news. It has been argued—with a degree of exuberance influenced perhaps by Dalal Street—that the economy has bottomed out. That is quite a left-handed compliment to the UPA—the belief that things can’t get worse. The most charitable riposte one can think of is that the optimism is debatable.
The devil is in the details. Industry which once grew in double digits has been sputtering for over four quarters. The data for the past 12 months reflects the consequence of the magnitude of inflation-fuelled costs and policy paralysis. Manufacturing has been negative for six of 12 months, mining for 9 of 12 months and capital goods for 11 of 12 months. Indeed, in the last 12 months, manufacturing has grown at 0.25 per cent, mining at 1.03 per cent, and capital goods at 11.45 per cent. It has been pointed out that the fall in capital goods output is the consequence of cheap imports. Perhaps it is so, but the question to be asked is whatever happened to the quest for competitiveness. Under the UPA, despite the many committees, manufacturing has regressed from being the potential saviour of the economy—shifting surplus labour from farms to factories —to a sector that desperately needs a saviour.
The bad news is that even if it has ‘bottomed out’, GDP growth threatens to stay so. The question that must now haunt policy-makers is whether 5-point-something is the new Hindu rate of growth. The 'Hindu Rate of Growth' as we know was coined by economist Raj Krishna to mock at the slow pace of growth through the Nehruvian socialist era. And the economy once again seems headed to the era of status quoism. On Saturday, I put this question to four of the most eminent persons in India’s political economy—Dr C Rangarajan, Dr Bimal Jalan, Dr Y V Reddy and Dr Subbarao. The consensus was that India could do better—notch 7 to 8 per cent GDP growth—but as Rangarajan pointed out, “it cannot come without doing anything”. Dr Jalan said, rather inimitably, “I hope you popularise this idea of a new Hindu rate so that something does get done.” The economy is stranded in a systemic crisis.
The central issue facing the economy is political profligacy. Consider the paradox: everything that must fall is rising—fiscal deficit, current account deficit and inflation. That which must rise is falling: GDP, exports, value of rupee. The alarm bells should have rung in the PMO when Pranab Mukherjee heralded government expenditure crossing `10 lakh crore as an achievement. The first question that should have come up is: who is paying? In 2009-10, the government was borrowing around `700 crore a day. In 2011-12, the government was borrowing `1,600 crore a day. Between April and October this year, the government has borrowed over `370,000 crore in 180 days. Inflation is now the principal output and growth a mere by-product.
There has been much debate about the need to cut interest rates—as if monetary policy can rein in the consequence of fiscal policy. Be that as it may, can a 25 or even 50 basis points cut revive manufacturing? And what about depositors—are they obliged to lend at negative returns on hard-earned savings when inflation is high? What about safety—what if the economy doesn’t turn around and the NPAs pile up? Interest rate is only one of the many factors influencing growth. It might interest the votaries that throughout the high growth period, interest rates only went up.
The central issue here is not affordability or availability but viability. Stalled policy spikes costs, delay inhibits viability and precludes growth. Corporates and PSUs are sitting on cash. Investors are sitting on the fence. Over `5 lakh crore worth investments are stalled for clearances. All of them are waiting for the patient on Raisina Hill to show some sign of life. Take the power sector which has a multiplier effect on growth and financial stress. Next month will be one year since the PMO took the initiative to clear the problem of fuel linkage amid banner headlines. There has been scarcely any movement on the ground. The need to create a national investment board is again a symptom of a larger crisis of onus.
The curious thing about India is governments individualise what should be institutional and institutionalise what must be individual responsibility. The quest for growth must be an institutional responsibility and every minister has an obligation to propel growth. Individual ministers seem wedded to the case-by-suitcase cause. Growth, it would seem, is another planet.
The theory of economics defines that growth must come from a virtuous cycle led by investment, employment, income, savings and consumption. The 5.5 per cent growth is led by consumption. Investment has declined and savings have fallen. It is estimated that at 8-plus per cent growth over 12 million jobs are created. At five-point-something, job creation will be much slower. To get a perspective, consider this: Over 16 million students enrol in graduate classes in universities across India. Do the math on how many will be jobless. The political consequence of poor economics will visit the UPA sooner than later.
Politics is the art of the possible and economics the negotiating instrument. The infamous Hindu rate of growth was but the secular failure to see the writing on the wall. The writing has been on the wall for over nine quarters now, and it is not in Greek, Spanish or Latin.
Shankkar Aiyar is the author of Accidental India: A History of the Nation’s Passage through Crisis and Change