Millennium Post

Recovery too feeble to work

Chidambaram patiently explained at a think-tank, the ‘micro-economic fundamentals’ at work in India (demographics, international economic integration, financial system and ‘sophisticated firms and workforce’ etc) which, according to him serve as growth foundations delivering one doubling of GDP every decade.

For the present, he listed some positive signs emerging, apart from good rainfall, like pick-up in exports and narrowing of trade deficit as well as reform measures over the past year. These would help the Indian economy to grow at over 5 per cent, perhaps closer to 5.5 per cent, in 2013-14. The finance minister had taken umbrage at IMF’s projection of a 3.8 per cent growth, demanding to know wherefrom it got its ‘special knowledge’ to lower its earlier estimate of 5.6 per cent.

He even suggested at the Fund-Bank Policy Committee meeting that IMF should review its methodology for growth projections. Not only IMF, but a wider range of international institutions, financial and economic, have commented on India’s sharp slowdown since 2012, compared to a number of other developing economies, let alone China, and highlighted structural constraints and a host of other governance factors besides the global environment. Their growth projections for India had also been lowered to below 5 per cent.

Government leaders started realizing that rather than keep blaming the uncertain global environment mainly for the setback, they should get down to becoming more actively involved and start clearing projects, public and private, held up for years for clearances with no accountability. Half of such ‘hold-up’ projects worth billions of dollars have reportedly been cleared. Here again, one has to wait and see how far decisions in this regard taken by the Cabinet Committee move into operational stages and completed.

The Finance Minister hopes at least a few of them would come to life early enough to aid the recovery in the second half of the year but many of them may still languish for want of ready availability of land or other resources and mineral inputs.  A 5 per cent growth looks feasible for the year and so also a narrowing of the current account deficit to some extent, with rupee depreciation helping exports and some contraction in imports. External vulnerabilities have been held in check for the present.

Government and RBI measures to attract some dollar flows through NRI deposits and also FIIs renewing portfolio investments may have helped in pressures on the exchange rate abating over the last few weeks and the rupee is seen stabilizing at 61-62 to the dollar. There has been no further erosion in the reserves, which stood at 279 billion dollars during the week ended 11 October.

Asked about the Finance Minister’s grievance against IMF growth projection, Anoop Singh, Director, Asia and Pacific Division, said IMF lowered its growth forecasts for India as ‘there has been fallout from recent stress.’ But he noted ‘corrective policies are being taken’ and ‘as a result, we expect growth to pick up in India next year.  Historical experience suggests it takes several quarters so that the economy may only fully recover next year (2014-15). ‘I certainly hope that we are wrong and that the economy recovers faster and the lags are shorter’, he said.

In the absence of a rebound in manufacture and investment revival so far, growth would remain subdued, significantly below potential in fiscal 2014, even if there is some delayed response from investors in the next five months.

Overall, the fact remains that the Finance Minister’s missions abroad and his fiscal and other reform efforts, commendable as they are, have not evoked the kind of investor response needed when the economy struggles toward recovery.

Growth expectation for this year is based more on the monsoon effect on agriculture, which is expected to grow to 3 to 4 per cent from the low base of last year, and partly from exports and the not-so-vibrant services sector as before. Progress being made on project implementation may get reflected in improved growth performance in 2014-15.

RBI Governor Dr Raghuram Rajan was at his pragmatic best suggesting both ‘irrational exuberance’ of the past and ‘excessive pessimism’ of the present needed to be filtered out in assessing the real India developments. With modest reforms, he felt, India’s slowdown could be reversed while agreeing that deficiencies like poor infrastructure, excessive regulation, small manufacturing sector, and a workforce requiring skills must be fixed, if India is to grow ‘strongly and stably’.

Chidambaram is determined to enforce budget discipline but one misses any zeal on his part in tackling a number of other relevant issues including persistently high food inflation even in years of record harvests. The failure to revive domestic investments at least in areas where no major impediments are involved is writ large. Nor has he done his best on centre-state partnership, harmonizing differences, for promoting growth which would become really ‘inclusive’.
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