The dot-com bubble had burst in 2001. With the history of a crisis every decade on average, the recent global financial crisis was par for the course. Yet in terms of intensity and timing, it was particularly unfortunate for India, hitting just as the country was establishing a record of sustained high growth.
During 2005-08, India had grown by over 9% every year. In 2008, the Growth Commission headed by Nobel laureate Michael Spence mentioned 13 post-war success stories, wherein countries had managed to grow at an average of 7% or more for 25 years or longer. Apart from the well-known cases of Japan, Hong Kong, Korea, Singapore and Taiwan, these included Botswana, Brazil, China, Indonesia, Malaysia, Malta, Oman and Thailand. The commission mentioned India and Vietnam as two others that “may be on their way to joining this group”.
Then, the crisis intervened. In the first post-crisis year of 2008-09, reflecting the negative sentiments worldwide, investment in India declined by over 3%, compared with a growth of well over 15% in each of the previous three. Net foreign investment declined from $43.3 billion in 2007-08 to $5.8 billion. In spite of a bumper foodgrain harvest, agriculture fared badly, primarily due to a fall in the production of oilseeds, cotton, jute and sugar cane. Export growth decelerated from over 20% in each of the three previous years to 13.7%. The current account deficit ballooned from $15.7 billion to $27.9 billion. With sluggish capital flows, foreign reserves, which had grown by $92 billion in the previous year, declined by $20 billion. Average wholesale price inflation accelerated from 4.8% in the previous year to 8%, and gross domestic product (GDP) growth decelerated from 9.3% to 6.8%.
A fiscal stimulus package of reduced taxes and stepped up expenditure prodded the economy to weather the first shock of the crisis. The fiscal deficit went up from 2.5% of GDP in the previous year to 6%.
In 2009-10, the second year after the crisis, growth bounced back to 8%. With the worst south-west monsoon since 1972, foodgrain production fell from 234.5 million tonnes to 218.1 million tonnes, and agriculture grew by only 0.4%. With a build-back of crisis-induced depletion of stocks, gross investment grew by 13.8%. With improved sentiments, foreign investment jumped from $5.8 billion in 2008-09 to $51.2 billion. However, 2009 was a bad year for world trade, and trade volume in goods and services declined by 10.7%. The current account started to show some vulnerabilities—for the first time since 2001-02, exports fell from $189 billion in the previous year to $182 billion in 2009-10.
The Centre’s gross tax revenue, which had declined from 11.9% of GDP in 2007-08 to 10.8% in 2008-09, fell further to 9.5% as the fiscal stimulus continued. The fiscal deficit expanded further from 6% in 2008-09 to 6.4% in 2009-10. The inflationary problem intensified from November 2009, and year-on-year wholesale price inflation in March 2010 breached 10%. Primarily driven by food items, consumer price index inflation was even higher at around 15%.
In the last post-crisis year of 2010-11, growth accelerated further to 8.6%, helped by a resurgence in agriculture from 0.4% to 5.4%. The signals, however, are mixed at best. A slowdown in growth of gross investment from 13.8% to 8.8% was accompanied by a more than halving of foreign direct investment in the first half of the year. Exports, on the other hand, showed renewed buoyancy by growing at 29.3% in the first 10 months of 2010-11, compared with a decline of 11% in the corresponding period a year ago. Foreign reserves grew from $279 billion to $303.5 billion in 12 months. Growth in the index of industrial production decelerated from 10% in the first 11 months of the previous year to 7.8% in the corresponding period of 2010-11. Inflation remained stubbornly high and ended the year at 9%.
In 2010-11, as the government started winding down the stimulus, gross tax revenue increased from 9.5% of GDP to 10%, and its total expenditure reduced from 15.6% to 15.4%. The fiscal deficit came down rapidly from 6.4% to 5.1%, mainly on the strength of a large increase in non-tax revenue in the form of 3G/Broadband Wireless Access auction.
The crisis has rightly been described as a “roadbump” by the Macroeconomic Framework Statement in Pranab Mukherjee’s Union budget this year. According to the International Monetary Fund, China and India—whose economies are presumed to expand by 9.5% and 8%, respectively, in the next two years—are expected to lead global growth. On the assumed pursuit of the right policies, the Asian Development Bank, in its recently released Asia 2050 report, also projects their prospects as bright.
Is the global financial crisis over? Any serious misjudgement on the issue will naturally lead to contrition in the future. But macro policies have to be “ahead of the curve” and a bet is unavoidable. Many governments across the world are talking of exiting from expansionary strategies. The UK is already implementing an expansionary fiscal contraction. In India, given the slow pick-up in investment, the widening of the current account deficit, stubborn high inflation and the long arduous struggle to get fiscal prudence enshrined in a legislative Act, a reasonably fast exit strategy appears to be the optimal course of action.
Ashok K Lahiri is an executive director, Asian Development Bank (ADB), Manila. The viewsexpressed here are personal and do not reflect those of ADB.
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