The Indian economy is losing steam at a pace that has surprised all but the most sceptical economists. It is now more or less certain that growth for the entire year will be below the government’s initial estimate of 7.1%.
The official estimates on economic growth in the third quarter do not tell a pretty story. It is not just the headline news—that quarterly growth plummeted from 7.6% in Q2 to 5.3% in Q3—that is cause for worry. What is even more troubling is the fact that growth has been propped up by the surge in government spending on staff salaries. The money that was promised to government employees after the recommendation of the Sixth Pay Commission has pushed up “community, social and personal services” by 24%.
These services are a measure of government output, which cannot be calculated with the same ease with which output of, say, cars or wheat can be. Staff salaries are hence used as a proxy for what the government is producing. So higher salaries rather than more or better services from the government have propped up economic growth, much as they did around a decade ago when the previous pay commission’s recommendations were implemented.
The new growth numbers should now—hopefully—shift the focus of debate from the tired old discussion about whether the Indian economy can maintain its recent growth rate despite the worsening global recession. Shorn of special factors such as salary hikes for government employees, it is quite likely that India is in the midst of a severe slowdown. Consumer spending does continue to limp along, but capital spending has slumped and inventories have climbed. The completely unexpected contraction of farm output—which may be exaggerated by the high base effect—has further complicated matters.
The next government will take charge in a few months, when it is quite likely that growth will have slumped further and the mess in public finances could have worsened. This is not a legacy that the outgoing government should be proud of.
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