A day after the International Monetary Fund (IMF) sketched a sobering view of the Indian economy, government statisticians only confirmed the truth of what IMF said. India is likely to grow at a tepid 5% in 2012-13 instead of the more upbeat 5.5% projected earlier.
All sectors of the economy are expected to grow at a much slower pace than expected before. Agriculture is expected to barely crawl at 1.8% in 2012-13 as compared with the more-than-double the rate of growth (3.86%) experienced a year ago. Manufacturing is likely to sputter at 1.9%. Last year, manufacturing clocked 2.75% growth. Services is expected to clock a more respectable 8.6%. But even that is a climb down from the 11.7% growth seen last year. All sectors of the Indian economy are expected to contract this year when compared with the previous year.
There is nothing unusual about this rather realistic projection. Over the past years, India’s potential growth has come down from a high of 7.5-8% seen before 2008 to just 6% currently. What this means is that the Indian economy can grow at just 6% without stoking inflation. In manufacturing, for example, private sector economists see spare capacity to shrink further, fuelling a supply-demand gap and, hence, leading to inflation later in the year. The way things stand, it is difficult for the government to engage in a stimulus or for the central bank to loosen monetary policy to kick-start growth. The government does not have the fiscal room to launch a stimulus while the central bank has to worry about inflation before it can address growth concerns by reducing policy rates.
Realistically, if India is to see “magical” growth of 8-9% again, then the response of the government should be on correcting the supply and policy bottlenecks that have choked growth. For example, much of the ability of firms’ pricing power has to do with shortages of raw materials such as coal, iron ore, minerals, etc. All this is passed on to consumers, hurting demand and, hence, growth. For starters, the government can do something to improve the supply situation of raw materials. More ambitiously, it can sort out issues such as land allocation and speed up clearances to infrastructure projects. These, and not some artificial and unsustainable stimulus and interest rate loosening adventure, are better options to revive growth. This will, of course, take time. But in the end a supply-side response is a more sustainable path to higher growth.
What should the government do to revive India’s economic growth? Tell us at firstname.lastname@example.org