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Reviving growth-Issues and Strategies

Reviving growth-Issues and Strategies

P M Mathew

According to the most recent growth forecast released by the Central Statistical Organisation (CSO) the growth rate of the Indian economy in fiscal 2013-14 will be only 5.6%. The fact that this is the second consecutive quarter in which the GDP growth rate has hovered around this rate forces one to conclude that the 2013-14 budget forecast of a 6.5 per cent growth rate will remain to be an elusive dream. The 12 th plan target too is slashed to 7% from the 8% envisaged. Against the backdrop of slow growth and burgeoning fiscal and current account deficits, finance minister P Chidambaram presented the Union budget 2013-14.  While fixing a 4.8 percent growth rate red line he forecasts a GDP growth rate of over 6 per cent for fiscal year 2013-14 and expects to cut the fiscal deficit to4.8 per cent of GDP .

The Asian Development Bank (ADB) on 17th July 2013 pared its 2013 growth projection for India to 5.8% from 6%.The International Monetary Fund (IMF) too lowered India’s growth forecast for 2013-14 to 5.6% from the 5.8% it projected in April 2013.

The growth rate for the year ended 31st March 2012 was 6.5 percent as opposed to the earlier projection of 6.9 per cent .The consensus opinion among economic pundits is that the current fiscal will record the lowest annual growth rate in well over a decade. The World Bank (WB) cuts India’s growth outlook for this fiscal to 5.7%.According to the WB India’s greater dependence on foreign investment to finance Current Account Deficit (CAD) has increased India’s vulnerability. According to the ADB slowing investment, weak industrial activity and plodding progress on reforms are weighing on the Indian economy. The steep climb down from the 9 percent growth rate achieved in the three years preceding last fiscal is characterised by a decline in growth rates in almost all sectors of the economy including agriculture, manufacturing, mining and construction. Mining sector registered a negative growth at 0.9 per cent in 2011-12 against 5 per cent in 2010-11.The manufacturing output slowed to 2.5 per cent from 7.6 per cent in the previous fiscal. India’s GDP growth lags China’s, having fallen to 4.5% year-on –year in the first quarter of 2013.

There has also been a decline in investment levels and   consumption levels. Reductions in government spending, weaker consumer demand and subdued investment activities accelerated the momentum of falling growth rate. Consumption expenditure as a percentage of GDP came down to 52.2 percent in the 4th quarter of last fiscal from 60.4 per cent in the same fiscal. The growth trend of the economy was characterised by high inflation, high level of fiscal deficit and current account deficits.

Most analysts are of the opinion that the Government’s inaction and policy paralysis are the major reasons for the current predicament. High interest rates have hit housing and infrastructure projects. Interestingly these are the sectors with the maximum multiplier impacts that can boost economic performance and productivity. To contain inflation the RBI hiked interest rates 13 times, raising the cost of capital and hindering growth, but inflation has not come down. There has been notable inertia on the policy front and continued failure to address fiscal imbalance. A high fiscal deficit built up by the government has crowded out the private sector.

We never built capacity to manage the large scale and size of the economy. The government and the private sector failed to create an infrastructure consistent with the $ 1.8 trillion size of the Indian economy. This infrastructure deficit is more felt in the case of railways, roads, power and ports. The toxic mix of fiscal populism, crony capitalism and bad economic management has ensured growth collapse featuring industrial stagnation, high inflation, fall in savings, investments and employment and high Current Account Deficit (CAD).

The combination of low growth and high inflation can weaken the economy further. Slower growth can lead to unemployment, sluggish tax collections, stressed government budgets and flight of capital. The Economist dated June 9th 2012 has even predicted a farewell to’ incredible India’ and has stated that India is destined for a period of lower growth. Rating agencies describe India to be the weakest among the BRICS nations. India’s slow down is due mainly to problems at home.  The main reason for the unprecedented depreciation in the value of Rupee was the inadequate capital inflows to cover the revenue account deficit. We must encourage capital flows and the sentiment for that has to be created. Concerted promotion of FDI and exports is the way out. Govt has to take measures to address business and consumer sentiment. Supply side reforms should be preferred since there is only limited scope for a demand side fiscal stimulus due to the already high fiscal deficit.

The parliamentary standing committee on finance in its recent report highlights the widening gap between the rich and the poor in India The expenditure share of the top 1% of India’s population increased from 6.5% in 1993 to 9% in 2010.India’s top 5% of the population spends 21.3 % of the total expenditure as against the 17.7% of 1993.

 

 

 

 

Recent  policies like reduction in public investments in crucial sectors like agriculture and infrastructure development, downsizing of employment in key public sector industries, closing down of loss making public sector units, casualisation of labour etc had adverse impacts on the income earning capabilities of the working population. Financial sector and trade liberalisation policies favouring the rich also resulted in growing inequalities in India. Reluctance of banks to lend to the priority sectors and the failure  of many micro finance institutions have resulted in reduced financial empowerment of small farmers and medium scale industries. Trade liberalisation is in favour of the export sector adversely affecting the import substituting domestic production. Labour intensive sectors were relegated to the back ground and capital intensive labour displacing sectors were encouraged. The much hyped IT and ITES sectors employed only a very small percentage of the labour force.

Many flag ship programmes of the government like the Mahatma Gandhi National Rural Employment Guarantee Programme (MNREGP) and the National Rural Health Mission (NRHM) have not resulted in expected out comes. As professor Stiglitz has stated, in India too, “the nexus between politicians and lobby groups had distorted the economy resulting in economic inequality.”

Throughout his budget speech, the finance minister was focusing on the need for inclusive and sustainable growth. He also highlighted the various opportunities for reviving economic growth. But the realisation of the targeted growth rate will depend on the actual implementation process, the commitment to be shown by all stakeholders and the global economic scenario. There should be a focus on reforms and governance aimed at revival of growth. This needs structural reforms both at the central as well as the state levels. Fiscal deficit must remain at the budgetary level.

It should be realised that sustained economic growth depends on real factors like the availability of key inputs such as power, on regulatory policies that determine the incentive to invest, on the state of infrastructure such as roads and ports, on removing restrictions to job creation for plentiful unskilled labour, on raising availability of skilled labour, on productivity of sectors such as agriculture and services where most demand has to be met largely by domestic supply, and so on.

Economic reforms have opened up multi-brand retail to foreign investors, moved subsidised fuel prices to closer to market determined prices, and deregulated the sugar sector. India’s task now is to liberalise the economy further, boost manufacturing and create jobs. The government must focus almost all of its energy on providing licenses and supply linkages for existing projects. There is also the need for legal reforms, corporate development, and the effective education of India’s fast growing population.

It is expected that though the economy cannot achieve the targeted growth rate of 6.5% it should turn around from the decade low 5% of last fiscal. As the Prime Minister Dr Manmohan Singh says there is a very good chance that we can achieve that with good agricultural performance and the effect of the various actions we are taking on infrastructure. Despite national elections due early next year, the government proceeds with price increases in diesel to reduce the losses of fuel retailers and take steps to further reduce the import of gold and crude oil that contribute most to the country’s CAD that hit 4.7% of GDP last fiscal. On the demand side there is the need to reduce the demand for gold and the demand for petroleum products. On the supply side exports needed to be pushed up. Reducing the CAD to the targeted 2.5% of GDP from 4.7% of last fiscal may not be possible. Very strong fiscal, monetary and supply side interventions are required to reduce the CAD.

 It should be understood that the most significant sources of economic growth are saving and investment in new capital, the growth of human capital, and the invention of new technologies. In order to make progress in the right direction, economic policy needs to stimulate saving that finances investment and in turn brings capital accumulation that drives economic growth. A holistic fast-track reform process is imperative to drive growth.

Dr P.M.Mathew is professor of economics at Christ University, Bangalore. Author of two books and several research papers in high impact journals, Dr Mathew is known for his cutting -edge research in health economics.  The distinguished research paper award from the Saudi Arabian government and the HTML award for the best submission at the Budget Agenda National level competition are Dr Mathew’s recent accomplishments.  Often invited as a resource person in economics, he also serves as a media economist contributing extensively to discussions and debates on current economic affairs. He can be contacted  pmat2012@yahoo.com

Disclaimer “The views are personal and not the views of the publisher”