The Indian economy continues to lose momentum at an alarming rate. New data released on Thursday showed that growth in the last three months of the previous fiscal year was the lowest in nearly a decade.
The economy is now being held up by consumption spending, which powered two-thirds of the growth in the fourth quarter. What is needed most urgently is an investment revival. High consumption without capacity creation will merely be inflationary, as it has been so far. The national investment rate continues to decline, and is now nearly five percentage points lower than what it was during the boom years.
High fiscal deficits built up by an irresponsible government have crowded out the private sector. India cannot regain its lost momentum without animal spirits being unleashed again, as is evident from the booms of the mid-1990s and mid-2000s. Getting investment activity back on track is thus perhaps the most important macroeconomic challenge in the medium term.
India has landed into this muddle because of spectacular mismanagement of the economy by the United Progressive Alliance (UPA). The editorial pages of this newspaper had warned even during the good years that the policies of the ruling alliance would do immense harm to the country in the long run, as it focused on ambitious spending programmes without bothering to strengthen the economy through reforms. The flaws in the strategy were camouflaged by rapid economic growth till 2008, which provided ample revenues to the government. The flaws are now out in the open.
The economics is inseparable from the politics. The division of powers between Manmohan Singh and Sonia Gandhi has not worked; it needs to be junked right away. But even more pernicious has been the fundamental ideology of the UPA, which is likely to leave a sorry legacy of declining growth, high inflation, huge deficits and loss of business confidence. Pretending that all would be well but for the crisis in Europe is convenient, but also untruthful.
This noxious combination of low growth and high inflation has afflicted our country before, in the 1970s. That was a decade of unrest. Indira Gandhi responded to economic problems by unleashing her style of radical politics while leaders in many Asian countries opted for economic reform. It took a lost decade for her to realize her blunder, and opt for a new way after she came back to power in 1980. The loss of economic momentum right now could pose similar political challenges, as lower growth leads to fewer new jobs, sluggish tax collections, stressed government budgets and a flight of capital.
A file photo of Prime Minister Manmohan Singh with UPA chairperson Sonia Gandhi.
What is to be done? The first thing the government needs to realize that we are in a mild form of structural stagflation, rather than a temporary cyclical downturn that can be managed through stimulus policies. Going by the statements of the policy elite since 2009, it is clear that they have fundamentally misread the economic situation. Structural problems require structural solutions. Manmohan Singh should know this, since he was an important part of the government led by Narasimha Rao that set India on a new course in 1991.
A crisis hurts, but it also offers opportunities for renewal. We realize that the current political situation does not provide much space for bold reforms. However, there is ample scope for sensible action even within the current political constraints.
Here are some options. First, data from the Centre For Monitoring Indian Economy shows that there has been a surge in projects that have been stalled for various reasons. The government should identify the most important of these projects and get them back of track. Second, there are many reforms in the pipeline that should be put on the fast track, if only to send a signal that all is not lost. The goods and services tax (GST) and the new direct tax code are obvious starting points. Third, specific sectors that have large multiplier effects should be given policy focus; roads and housing are two possibilities, because they will generate strong demand for cement, steel, equipment and labour.
India has made the same mistake that many Latin American countries made in earlier times. For example, Brazil was the darling of the development crowd in the 1950s and 1960s, but it failed to tackle problems of economic stress, growing inequality, corruption, crony capitalism and inflation. The Brazilian economy more or less stagnated between 1980 and 2005.
A lot --- from individual advancement to national power to social spending --- depends on economic performance. Is India headed the Latin American way? Some of the loose talk about India being replaced by Indonesia in the BRICS community or the inevitability of a 1991-style crisis may be overdone. But it would be good to remember that many countries have lost their way after an initial growth spurt. India is currently running that risk.
The Sonia Gandhi-Manmohan Singh combination has made a mess of things. A billion Indians deserve better.
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