BackTaking stock of India’s mess
The next government in New Delhi will inherit a serious mess that has been created by hubris during the boom years followed by policy paralysis since 2009
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The Indian economy has been a bit like our cricket team: very impressive under benign conditions but totally exposed when there is a bit of grass on the pitch. The hubris in government during the boom years was akin to the arrogance of our batsmen when they hit across the line with such evident ease on dead domestic wickets but end up giving catch practice to the slip cordon when the ball is seaming in South Africa or Australia.
It is convenient to say that India has run into trouble because the overall global economic mess but the harsh truth is that our preparation for a downturn was abysmal, thanks to the lack of economic reform or fiscal good sense when the going was good. It was not uncommon for government economists to claim as recently as 2011 that the Indian economy would go back to its old trajectory soon even as inflation fell. The recent quarters have been a welcome wake-up call, like a splash of cold water in the face.
This is a good time to take stock of how far the economy has drifted away from the goals the current government set for itself over the past few years. Consider these three examples:
Economic growth: The Planning Commission has projected an average growth rate of 8% for 2012-17, the period of the 12th Five-Year Plan. The Indian economy grew at 5% in 2012-13 and is likely to expand at a similar rate in the current fiscal that will end in March 2014. What this means is that India will have to register double-digit economic growth in the next three fiscal years if it is to meet its planned growth target, something which even die-hard optimists will find trouble believing. To its credit, the Planning Commission had said that the growth target could be met only if there is a coherent policy push to generate inclusive growth. It had also (in a first) mapped out two other scenarios: a situation of insufficient action which could see an average growth rate of between 6-6.5% and a situation of a policy logjam where growth would drift to 5-5.5%. There are no prizes for guessing which scenario reflects the current Indian reality.
Manufacturing renaissance: An impressive National Manufacturing Policy was unveiled in 2011. It had two important goals—to raise the share of manufacturing in the Indian economy from 16% to 25% by 2025 and create 100 million new factory jobs. The first goal implicitly meant that Indian manufacturing would have to grow around four percentage points faster than the rest of the economy till 2025 while the jobs target meant that India had to create 100 million factory jobs in around 15 years though it had created only 50 million such jobs in the six preceding decades. The manufacturing strategy was overdue, but India has got off to a bad start. A recent study by the Confederation of Indian Industry and Boston Consulting Group shows that the share of manufacturing in the Indian economy is now at 15.1%, the lowest in a decade. So the relative size of Indian manufacturing has actually shrunk.
Fiscal deficit: The years of strong economic growth had helped fill the tax coffers. The fiscal deficit had begun to fall. The United Progressive Alliance decided to go on a spending spree in February 2008 with an eye on the general election due a year later—and many months before the global economy got into trouble. It then provided another strong fiscal stimulus in 2009 after the global financial crisis. This stimulus was never adequately withdrawn, one reason why inflation rose. The 13th Finance Commission, headed by Vijay Kelkar, had in 2010 provided a new road map for fiscal consolidation to replace the old Fiscal Responsibility and Budget Management Act. The government accepted the new road map. According to it, India should have had a zero revenue deficit by March 2014 and a fiscal deficit of 3% of gross domestic product. Neither of these fiscal targets are anywhere near the horizon. Finance minister P. Chidambaram has promised to keep the fiscal deficit this year to below 4.8% of GDP, impressive given the mess he inherited in the middle of 2012 but still 1.8 percentage points higher than the original target.
The economic discourse is often dominated by high-frequency data that is released every month or quarter, but that means inadequate attention is paid to the worrisome drift away from the medium-term targets. The trends in economic growth, manufacturing growth and public finances show that the second Manmohan Singh government is nowhere near the goals it set for itself. All the excited talk in recent weeks about whether the Indian economy has bottomed out should be heard against this backdrop of medium-term drift.
The next government in New Delhi will inherit a serious mess that has been created by hubris during the boom years followed by policy paralysis since 2009. It is not a pretty picture.
Niranjan Rajadhyaksha is executive editor of Mint. Comments are welcome at cafeeconomics@livemint.com. To read Niranjan Rajadhyaksha’s previous columns, go to www.livemint.com/cafeeconomics-
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