Introduction
When I read what
politicians are saying and reportedly thinking, I am afraid that, as in 2009-10
they will once more become too complacent and ignore the need for continuing
reforms over the next three years (not just this year), and permanently loose
the opportunity of restoring growth to
its medium-long term potential of 8% to 8.5%. When I talk to people from the World of
Business and Private Equity (the long term investors) I often find a deep
despair about a host of government actions and inactions that have stymied
growth of output and investment in the recent past. I fear that their pessimism will slow the
pace of recovery even if the political system produces genuine reforms of the “permit-inspector
raj”. Both the over-optimism among
politicians and the excessive-pessimism among business and industry can be bad
for economic recovery. We need a
realistic balance between the two, if we are to get both a reasonably quick and a sustained
recovery.
Reasons For Pessimism
Two numbers from
the Economic survey, encapsulate the negative story for 2012-13: One is the Current Account Deficit (CAD) of
4.6 per cent of GDP and the other is the growth rate of Gross Domestic Product
at constant market prices (GDPMP) of 3.3 per cent. These are both unprecedented and
unsustainable numbers. The growth
projection of 5 per cent for GDPFC that shocked many observers, is 1.8 per cent
point higher than the number for GDPMP. We
last had such a low growth rate for GDPMP during the BOP crises of 1991-2 when
it plummeted to 1 per cent. The CAD of
4.6 per cent has no historical precedent; the worst historical CAD was 3% of
GDP in 1990-91 when the BOP crises started.
The high inflation rate, best captured by a five year average 9% rise in
the implicit GDP deflator for private consumption, is another symptom of
macro-economic imbalance. However, it is still lower than the nine year average
of 9.9% from 1990-91 to 1998-99.
Parallels With BOP Crisis of 1991
Despite
underlying imbalances that are arguably worse than in late 1980s, there has
been no crisis this time. The reason is
the foreign exchange, trade and capital account reforms of the 1990s, which
have allowed the economy to adjust without blowing up into a full-fledged
crisis. But the underlying problems
still need to and must be addressed if they are not to act as drag on the
economy or lead a BOP crisis a decade later. Fortunately, because of the 1990s reforms, we now
have more time to address them. These
reforms proved that a combination of “macro rebalancing” and “structural
reform” could correct the macro imbalances and bring us on to a higher growth
path than the 1980s. The former involved a classic (fiscal) expenditure
reduction cum expenditure switching policy of real depreciation, which got us
out of the 1990 BOP crises.
Intelligently adapted to current economic conditions, including a much
more open economy, it can still bring results. In this context, policy actions
to facilitate short term external financing of high CADs and increase nominal
appreciation, are misdirected.
Reasons For Optimism
The Indian
economy looks better from a medium term global perspective. India is currently one of only seven
countries (out of around 250) in the World with an average decadal per capita
GDP growth rate of over 6% (2003-2012). The ratio of India’s GDP growth to the growth
of World GDP shows virtually no trend since 1994 (figure). In other words India has maintained its
growth performance relative to the World economy since 1994, even though in any
given year it may have performed better or worse (as in 2012). Similarly the ratio of the Indian Economy’s
growth rate to that of China’s has been on a rising trend since 1994, as
China’s growth slowed relative to the World economy. This trend rise in India’s growth rate relative
to China’s is very modest, from about 60% of China’s rate in 1994-1995 to about
80% in 2011-2012. From this global
medium term perspective, 2012 is a bad but not unprecedented setback, from
which we can still recover if we take the necessary corrective steps over the
next three years.
Policy, Regulations And Institutions
There is need
for policy, regulatory and institutional reforms. Part of the extreme business pessimism stems
from the fact that one of our most cherished beliefs, since the 1991 reforms,
has lost its credibility. When reforms
slowed after the initial burst in 1990s, we (in the MOF) used to tell foreign
investors that the pace of reforms and the sector preference may vary with
every government, but no government including the left front, had reversed any
reform. Gradually at first, then more
rapidly, negative practices of the old “license-permit-inspector raj” have
returned, in sectors/areas still under the control of the government. Whether this happened inadvertently or
deliberately, it has affected both domestic and foreign investors in the real
economy and is a factor in the investment collapse. It needs to be corrected through regulatory
and institutional reforms. Don’t be
misled by the FIIs lack of concern on this score, as short term investors are
quite happy to profit from the high interest rates relative to US, Europe and
Japan and finance the high CAD for now.
Realism And Reform
In conclusion
the Indian economy is not in as bad shape as investors in the real economy
think nor is it as good as many politicians and political advisors think. The government must not abandon (at the first
sign of recovery), its efforts to correct the imbalances and bottlenecks that
have arisen. The real economy investors
must shed their pessimism, as government makes genuine efforts to restore
growth, and start investing. More realism on the part of both can return the
economy to the long term growth trend more quickly.
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A
version of this article appeared on the editorial page of, The Indian Express on Wednesday, 13th March, 2013, under
the banner, “Two Stories of The Economy,” at,
http://www.indianexpress.com/news/two-stories-of-the-economy/1087095/
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