Rising Indian economy

The last quarterly figures on the GDP have been touted by some as India scoring over China. India has grown by 7.2 per cent against China's 6.8 per cent in the same period. Hence, out went the verdict: India displaces China as the fastest-growing major economy. Little concern though that it was just one-quarter estimates and things could just as well reverse the next quarter. Even then, one quarter does not make a summer just as one swallow does not.

At around $10 trillion, China's 6.7 per cent growth would add so hugely more than India's growth at 7.2 per cent when the size of the economy is just about a quarter of that of China's. So, even at a lower rate of growth, China would add to its economy about three times more than India. That's what underlies growth comparisons. The US economy is growing just by 2.5 per cent but the size of its economy is mindboggling and it would take very many years to approximate the size of the US.

Leaving aside the comparisons, the latest figures are useful from several perspectives. First, the figures help dispel at least some of the pessimistic patina of the current post demonetised narrative. It was widely maintained that the twin hit of demonetisation and GST had derailed the growth momentum. The figures give a lie to it. The Indian economy is growing and at a comfortable clip, smartly recovering from the disruptions caused by at least demonetisation, which was thought to have sapped the investment well-spring.

It is in this context that the most optimistic point to emerge is the issue of investment. The Economic Survey had noted and pointed out the need to step up investment in the economy. The Indian economy had grown best during the years of high savings and investment. In the last one year that appeared to be a dimming prospect. Now, this has seemingly changed. Gross capital formation is estimated to have shot up by 12 per cent. A vindication of this is to be found in another set of figures released almost simultaneously. The latest figures on the performance of the core sector gave reason to think that investment would surely have risen. Cement production showed a hefty growth this time which could not have been possible without a pickup in the outlays on infrastructure creation and housing. These will, in turn, push up the demand for steel as well. Both these sectors had shown happy tidings in the core sector performance figures. So far, so good.

While it is good news that the gross fixed capital formation has improved and that too smartly for the quarter, the issue is how to sustain that level. On the face of it, the GFCF creation had been aided by the greater government spending on projects. This would have reflections on the annual deficit in the Budget. Unless this is followed up by higher private sector investments, it will be difficult to maintain the level of economic activity. And here is the catch.

Already, prices are on the rise. The Reserve Bank had set an inflation target of 4 per cent with a leverage of around plus/minus 2 per cent. The current level of inflation rate is in excess of 5 per cent and the Budget could as well be somewhat inflationary. The government promises higher minimum support price for farm products. These are somewhat unavoidable with a general election around the corner. The fiscal deficit is also slipping, which will add to the pressure. The question is: will the RBI keep following a benign monetary policy with lower rates of interest or, under the pressure of rising inflation, would the RBI be obliged to jack up policy rates.

Surely an environment of rising interest rate would be inimical to higher investment. Larger government borrowing to fund its deficits would also add to the interest rate pressure. In fact, the financial markets are already behaving as if these would be a reality in the forthcoming months. How then should high investment levels be maintained with these developments? The task of economic management in the forthcoming months would be critical. The government will have to maintain prices in the face of numerous promises of appeasement to segments when finances are none too comfortable to make the two ends of the government expenses meet.

Second, it would be a very difficult global environment in which India will have to make its own position. The United States has already kicked off a trade war in which China is apparently at the receiving end. Stiff tariffs are being slapped on items which China will likely try to dump on countries other than the US. It would create an export-unfriendly environment for India. On the other hand, the domestic market is being serviced by imported goods. The imposition of a tariff on imports would be handy for us, though the current economic orthodoxy would squarely go against it. These are times when orthodoxies should go out and pragmatism should come in. In the Mecca of capitalism, the USA has adopted policies best suited to their national interest irrespective of what purists had suggested. In the aftermath of the financial meltdown, the US government did not dither from pumping in billions into their beleaguered banks, turning them overnight into government-owned banks. That was unbearable to free-market believers, but it saved the huge inconvenience of serial bank failures and disruption of the entire financial system.

Till now, we have managed to maintain our growth, but as things grow increasingly complex in the coming months the task of maintaining and sustaining the growth of the Indian economy while creating jobs, pragmatic policies would be needed to be followed, irrespective of how obnoxious they are thought to be by academics. The national income statistics give pointers to these.

(The views expressed are strictly personal.)