Time for UPA to arrest decline in economic fundamentals
By S. Sethuraman
Paradoxically, on the twentieth anniversary of the launching of economic liberalization, India finds itself in 2011 in a state of drift, not just politically but even more, damagingly on the economic front. The rulers (UPA-II) seem to have lost the grip over governance in every sphere. Inflation and corruption have taken a heavy toll on UPA Government’s image and credibility, resulting in a huge loss of confidence. We are left with reassuring speeches and reaffirmation of decade-old commitments.
The economic slowdown, partly attributable to the adverse impact of the crisis in major advanced nations (USA and EU), has brought to the fore the structural weaknesses in India’s development strategy. But the best economic brains in Government are largely adhering to continuity in the flawed development strategy in the next (12th) plan, on the premise that high growth on a sustained basis (if achieved) would be the solvent of all our ills.
Of course, the ‘trickle-down’ has been refashioned as “inclusive growth” with a hope all past failures in delivery of services to the targeted poorer sections would be substantially mitigated over the next five years. But, after six decades of planning, India’s poverty ratio is still relatively high and the country, along with South Asia as a region, remain home of a majority of world’s poor. India’s vibrant democracy and constitutional obligations notwithstanding, the country is humiliatingly down on the United Nations Human Development Index on several counts.
The economic slump in 2011 has more to do with, what is widely perceived but stoutly denied, “policy paralysis” in the UPA Government, which has affected output, kept inflation high, impeded fiscal correction, and allowed core infrastructural weaknesses to build up. No doubt as a country priding itself on globalization, India is vulnerable to shocks from crises in the world economy. Currently, the most feared prospect is the spread of contagion from the turmoils in euro-zone, afflicted by a sovereign debt crisis, and the fiscal conundrum in the world’s largest economy, USA facing deficits and rising debt over the coming decade or two.
Maybe, it has begun to impact India via the trade channel as the surprisingly strong export performance in the first half of 2011-12 has begun a downtrend as demand in developed markets weaken. India has been running increasingly large trade deficits and the current account has edged close to the tolerable 3 per cent of GDP. It would be perilous to exceed this order of deficit with the uncertainty of capital flows, which have been counted upon to bridge the external gaps.
India’s GDP growth target itself has had to be slashed to 8 per cent while other emerging negative signals in industry and infrastructure point to a further drop below, RBI tentatively estimating it at 7.6 per cent. The growth slowdown thus far is essentially the result of policy stasis combined with failure to combat inflation on the supply side.
RBI’s monetary tightening over the last two years raising policy lending rates successively to contain demand pressures has certainly pushed up lending rates to the chagrin of corporates and households, which is cited as a factor for the industrial growth slowdown. But global uncertainties and persistently high crude prices are as much to blame for the lackluster investment climate.
Global investment firms expect growth to range 7 to 7.5 per cent. This has serious implications on the budgeted revenues, some dimensions of which would become known when the Finance Ministry presents the midterm review in Parliament’s winter session opening November 22. Tax revenues so far (April-October) are not commensurate with the budgeted targets but Government spending has been excessive. Revenue and fiscal deficits are too high for comfort, way above the fiscal deficit target of 4.6 per cent of GDP.
In the first half of the year, Finance Minister Mr Pranab Mukherjee was sounding confident of hitting both growth (8 or 8.2 per cent) and the deficit targets, but he has now conceded that the deficit could be a little higher but would still be less than 5 per cent (GDP). Meanwhile Government has increased its market borrowings by Rs. 53,000 crore to take the budgeted total above the Rs. 500,000 crore mark. Subsidies – food, fertilizer and oil products would all be exceeded.
Besides, post-budget commitments relating to higher amounts for bank recapitalization, especially SBI which was downgraded by Moody’s citing stress on asset quality and pressure on Tier-I capital, and under other heads including Air India in financial turbulence would make balancing difficult. Political exigencies for the UPA-II Government, surviving mainly on the support of two regional allies (TMC and DMK), may demand that the Centre meets the special needs of some states, especially the TMC leader Mamata Banerjee Government in West Bengal.
Therefore, the UPA Government’s expectations of getting back to higher growth trajectory on a sustained basis in the near/medium term could prove illusory. Meanwhile, economic variables are disconcerting in 2011-12 all over, and India is no exception. Industrial growth has lost its momentum and the first half (April-September) registered a 5 per cent growth (as against 8.2 per cent last year), the decline being sharp in mining and manufacturing and categorywise, capital goods and consumer durables..
Proceeding beyond monetary tightening, corporate chieftains have squarely put the blame on Government for “policy inertia” causing uncertainty in economic environment affecting business and consumer confidence. A three-day India Economic Summit sponsored by the World Economic Forum, business leaders joined in calling for a new model of “democratic capitalism” with focus on achieving the vision of sustainable and equitable growth involving both the Centre and the States. They urged the Centre to move with speed in decision-making and welcomed the new Manufacturing Policy with its thrust on job creation. The past is no guide on job creation in the large manufacturing sector which did not add to employment even in the post-liberalisation years. Employment on a large-scale occurred in the small-scale sector, whatever the high ambitions underlying the new Manufacturing Policy. (IPA Service)