The optimism of the Manmohan Singh government is well known. For all purposes, India is experiencing a mild stagflation. That has not prevented government economists from continuously issuing positive forecasts. Private sector economists feel otherwise: Most now peg the growth rate for 2012-13 in the 5.4% to 6% range, the latter number being distinctly positive.
On Monday, the ratings agency Standard and Poor’s (S&P) reduced its 2012-13 growth forecast for India by one percentage point to 5.5%. A poor monsoon and continuing weaknesses in the global economy lay behind its new projection. Almost at the same time, the chairman of the Prime Minister’s Economic Advisory Council, C. Rangarajan, said the economy will grow by 6.7%. He said the monsoon had turned out to be better than the projections made some months earlier.
It is not clear what lies at the basis of this optimistic number. Recently, JPMorgan estimated that India’s potential growth has fallen to 6-6.5%, down from the 2003-07 average of 8-8.5%. As a result, there is more here than mere shortfall in the monsoon (or its “wrongfall”—the monsoon did pick up in the last month or so but not at the time when rainfall was most needed in regions dependent on rain for irrigation). It is true that an adverse monsoon is akin to a supply shock to the economy, but this does not explain the persistence of slow growth and high inflation in the past 12-18 months.
This puts a different complexion on the policy steps that are needed to revive growth. For one, if the decline in growth is due to lowering of potential growth—due to a decline in productivity growth and investment—then more is at work than a mere supply shock. If it is just the rains, then probably things will change for the better on their own. Even the most optimistic Indian feels otherwise.
In the short run, the next six to 12 months at least, the Indian economy will need painful medicine to recover. In the past 10 days, a small shot was given in the form of higher prices for diesel. Much more will be needed before matters are set right. As written earlier in these pages, it is not clear if the government has the space to do that or, for that matter, if the political climate in the country even permits that. It is better to suspend belief in positive growth projections for some time.
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