New Delhi: In three weeks since 29 February, India’s economy seems to have travelled back in time 11 years.
Data released last week showed that inflation, as measured by the wholesale price index, was at 6.68% for the week of 15 March, a 13-month high. This comes in the wake of a global credit crisis that continues to play out across markets. Economists and even the government itself have said that India’s growth could slow in coming months. The combination of factors reminds some analysts of 1996-97, the start of the last economic downturn India witnessed.
Industrial growth plunged to 6.1% in 1996-97, down from 13% the previous year. Inflation was at 6.9%, and prime lending rates, the rates at which firms with sound financials can borrow from banks, were 13.5-14%. The year was also the last in office for the P.V. Narasimha Rao government. And it was a year that saw the last big increase in government salaries.
As the ruling Congress-led United Progressive Alliance (UPA) government enters its last year in office—one that will, coincidentally, see another significant increase in government salaries—the economy is showing signs of a “classicial cyclical slowdown,” according to Samiran Chakraborti, chief economist, ICICI Bank.
Still, Chakraborti, like most other analysts and experts, is not sure the current economic situation mirrors that in 1996-97. “There is simply no comparison,” said Saumitra Chaudhuri, economic adviser, Icra, and member of the Prime Minister’s economic advisory council. “The two situations are vastly and dramatically different.”
First off, he said, “the Asian economic crisis happened soon after and commodity prices were at an all-time low. Today they are at an all-time high. Steel was $180 a tonne then, it is now $900.”
Even the financial sector had barely evolved then, he added, and “credit considerations still followed ancient norms. “Corporates embarked upon expansion plans based on old economy ways and got into deep trouble. Today they have restructured and become much more efficient.”
“The investment goods story is much stronger and fiscal incentives will give a fillip to consumption. We’re a more resilient economy today because of investment demand,” ICICI Bank’s Chakraborti added.
Indeed, the current phase of growth has been led by an unprecedented investment boom. With investment levels at around 36% of GDP, India has reason to hope that its economy will continue to grow despite a slowing in consumption levels. And the economy is also much bigger—it is now nearly four times the size it was in 1996-97.
“The most important fundamental difference is that right now, we have an abundance of resources. We can import anything we want if we want,” said Bimal Jalan, governor of the Reserve Bank of India during 1997-2003, referring to the country’s improved financial position, especially in terms of foreign currency reserves which were at $309 billion (Rs12.36 trillion) on 17 March.
In 1996-97 the Fifth Pay Commission bonanza to government employees left most states in the red, leading to a combined government fiscal deficit, or gross borrowings, of 10% compared with 5-5.5% now. The Sixth Pay Commission’s recommendations that have been announced—assuming they are accepted by all states—will push up the fiscal deficit by another 2% of GDP.
Dharmakirti Joshi, principal economist, Crisil, said :“Directionally, the two scenarios (11 years ago and now) are the same, but quantum-wise they are different. Eleven years ago, 8% growth had a different meaning, while now, even 6% inflation is considered too high.”
Still, according to Joshi, the UPA government faces the same dilemma the Congress government did in 1996-97: A trade-off between growth and inflation. Growth can still be above 8% if today’s investment rates can be sustained, Joshi said.