Last week, the Indian Meteorological Department (IMD) finally conceded the obvious and admitted that this year’s monsoon and its own forecast was way off the mark (another matter that now they are quibbling on semantics as to whether this could be a meteorological or an agricultural drought). Immediately thereafter, the government, fearing a serious setback to agriculture, signalled that this year’s growth would drop even lower than what had been conservatively projected by the Reserve Bank of India (RBI) in its quarterly review of monetary policy last week.
The economy is expected to grow in 2012-13 not by the over-the-top claim of 7.6% in the Union budget this year; not even by the 6.5% projected by RBI. Instead, the deputy chairman of the Planning Commission, Montek Singh Ahluwalia, claims it will be around 6%—a low that the country has not known for nearly 10 years.
This is the first formal sign that a recalibration of the economy is underway; in short, the government is signalling that the party is over for now. Maybe it is just a coincidence; but the move has come after a change of guard in North Block. Though the eternal optimists—especially those who have shamelessly sought to talk up the economy knowing fully well that the facts suggest otherwise—will baulk, this dose of pragmatism is welcome.
The reasoning is simple: the best way to stop a downward spiral is to seek out the bottom; since December, every quarter has proved that the worst is yet to come, while policy wonks continued to hold out—inflation would moderate, leading to a cut in interest rates and a revival in investment. Now, for the first time, claim is looking to reflect reality.
The fact of the matter is that for the past two years, India has been living beyond its means by projecting a growth much higher than what would actually be achieved. And every time growth dropped lower than forecast, there was a consequent fall in government receipts—inevitably pushing up national debt. And since it has largely gone to fund current expenditures, it has not added to the investment capacity of the economy either.
Similarly, the private sector, too, it seems, has been living beyond its means. Pointing this out in his column Method and Manner, published in Mint on 8 July, Haseeb Drabu said, “Total corporate debt now accounts for 88% of the funding, twice of what it was in 2007-08. This exceptional situation has arisen as in the last three years the rate of growth of borrowing has been consistently higher than the rate of growth of capital expenditure of the private sector. It follows that borrowings are being used to finance current expenditures and not capital expenditures.”
After the reality check on growth, hopefully, the new leadership in North Block will also disabuse the mindset of short cuts that seems to have gripped all of us. Almost everything is sought to be a quick fix—a culture that has permeated every level of the Indian society. Whether it be the choice of the new finance minister, allowing more foreign direct investment in retail or being on the start-up fast track, the general impression that is being given is that there is that magic wand out there. Implicitly it assumes that one can ignore the problems, which need a lot of hard work to fix, and simply leapfrog out of trouble. Nothing could be more untrue.
While, indeed, it is a fact that the country has come a long, long way in the previous decade, especially in terms of material well-being, it is also a fact of life that India has many miles to go before it can justify its otherwise premature elevation to the global high table. The power outages that affected 700 million people last week established that even in a slowing economy the country’s power capacity had already been breached; to realize its potential, the country’s power capacity has to be dramatically enhanced—to do so means answering vexing trade-offs between environment and development.
In a democracy, all this needs time. In a dysfunctional coalition like the Congress-led United Progressive Alliance (UPA), progress is even less incremental. No doubt, the second tenure of the UPA has resulted in a missed opportunity; but it is done and can’t be reversed. The failure of the monsoon has only exacerbated the macroeconomic problems of the nation.
It is a familiar situation, though; India has been there before. More importantly, it has bounced back and will do once again. Recalibrating the economy is the first step in that direction.
Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org
Also Read | Anil Padmanabhan’s earlier columns