Very often, it is tempting to take heart from high-frequency data such as the assorted purchasing managers’ indices (PMI), the index of industrial production (IIP) and other indicators to believe that growth has bottomed out. It may have. But here’s the rub: Even if growth has bottomed out, it is unlikely to go anywhere above the 6% mark. For a country of India’s needs that hardly sounds promising. There is not much the government can do to take it to the desirable levels seen in the past years. This is primarily due to three reasons.
One, the fiscal and monetary policy mix required for growth under ideal conditions—low deficits and low interest rates—are beyond the government’s abilities. It can, of course, try and browbeat the central bank into lowering the policy rate. But whether it can reduce the deficits—fiscal and current account—to a reasonable level is an open question. A high deficit and lower interest rate regime can only mean one thing: higher inflation.
Two, 2013 is likely to see a “Christmas tree” budget—sops distributed liberally across vital voting constituencies. As such, even the homeopathic fiscal correction—a 5.3% fiscal deficit as a percentage of gross domestic product in 2012-13, leave alone the budgeted 5.1%—is likely to be wiped out in this frenzy. Even if the finance minister were to be take a hard line—which his party won’t allow—he will not be able to effect a one percentage point, or larger, correction in this number. For an economy of India’s size, this is asking for too much.
Finally, much of the magical growth of the previous years was due to a generous global environment. India had reasonable deficit numbers and, overall, economic imbalances were away from view. But after 2007, government expenditures galloped way beyond revenue and the policy mix turned toxic. Under these conditions, even getting inflows to plug the current account deficit is a challenge, leave alone large-scale foreign investment. And by the way, India’s political leaders don’t like foreign capital. That completes the vicious circle the country is caught in.
So green shoots are likely to remain what they are—small plants incapable of turning into trees. India’s arid economic landscape will ensure that for some time at least. Time the government stopped dreaming and began taking baby steps to recovery.
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