T N Ninan: The vital signs
To the long record of government leaders promising jam tomorrow, we must add the prime minister’s forecast on Independence Day that GDP growth this year will be better than last year’s 6.5 per cent. Now, three months later, the finance minister has lowered expectations to the 5.5-6.0 per cent range, but he expects growth next year to be back up to seven per cent. In other words, “jam tomorrow" once again. If you keep predicting this till kingdom come, it will eventually turn out to be true. But will it be next year, or the year after, or still later? And has the economy bottomed out, as Montek Singh Ahluwalia says, although the latest monthly industrial production, trade and inflation figures are as depressing as any? Could we, instead, be heading for more bad, indeed worse, news?
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The pointers to the future are the macroeconomic numbers – the fiscal deficit, the trade deficit, and the level of inflation – which you could say are the equivalent of the system’s pulse rate, blood pressure and temperature. All of them are higher than normal, or what is desirable; indeed they are higher than what is being recorded by most other economies. And all three readings have stayed stubbornly high despite the government’s ministrations. In short, India’s economy has been and continues to be off balance. The more accurate metaphor would be “over-heated", except that it is odd to say so when growth is slower than it has been in a decade. Still, the logical conclusion would be that the system needs to slow down some more, so that its vital signs get closer to normalcy, before structural adjustment measures (ie real reforms) prepare the ground once again for faster growth. In short, not jam tomorrow but more pain before (at some point) the good times return.
This is not a pleasant prospect, and it must be hoped that the economy surprises by doing better than what the numbers suggest. But if you take the facts as they are, the fiscal deficit this year, projected by the finance minister at 5.3 per cent of GDP, may end up closer to last year’s 5.8 per cent; that’s nearly twice as high as where the government would want it to settle. The combined Centre-state deficit is the third highest in the world. Inflation, similarly, is higher than in almost all countries. And the current account deficit has been projected at 3.8 per cent of GDP, the second highest ever for India, and better only than last year’s 4.2 per cent. Meanwhile, imports in October were a staggering 90 per cent more than exports. Still believe that the economy is not off keel?
The standard remedy for an economy that has high twin deficits (fiscal and trade) and high inflation is to reduce demand. Governments must raise more revenue and spend less; commodities with controlled prices must see further hikes, to reduce subsidies; in short, belts must be tightened. Incentives must be given to boost exports, and steps taken to control imports, so that the trade deficit shrinks.
What if a government does not do these, because of approaching elections, or because it does not have the stomach for tough, unpopular decisions? India’s public debt will climb, and it is already the highest among all emerging markets, in relation to GDP. Interest rates will stay high, the country’s credit rating will drop, the rupee will fall further, and dollar inflows could slow down. In short, a reprise of the early 1990s. At some point, whoever is in office will have to undertake full-scale macroeconomic adjustment. One wishes all this were not the case, and that the economy can somehow avoid having to take bitter medicine. But anyone in a mood to predict faster growth?