By Anjan Roy
What was until recently esoteric has become mainline now. Nobody earlier would have bothered about some figures regarding national income, which were left best to some eccentric economists. But now? It is followed with fervor like cricket scores. Rivals are the countries and national income indicators are their vital statistics.
The last quarterly figures on GDP have been touted by some as India scoring over China. India has grown by 7.2 per cent against China 6.8 per cent in the same period. Hence, out went the verdict: India displaces China as the fastest growing major economy. Little concern though that it was just one quarter estimates and things could just as well reverse the next quarter. Even then, one quarter does not make a summer just as one swallow does not.
At around $10 trillion, China’s 6.7 per cent growth would add so hugely more than India’s growth at 7.2 per cent when the size of the economy is just about a quarter that of China’s. So even at a lower rate of growth China would add to its economy about three times more than India. That’s what underlies growth comparisons. US economy is growing just by 2.5 per cent but the size of its economy is mind boggling and it would take very many years to approximate the size of the US.
Leaving aside the comparisons, the latest figures are useful from several perspectives. First the figures help dispel at least some of the pessimistic patina of the current post demonetized narrative. It was widely maintained that the twin hit of demonetization and GST had derailed the growth momentum. The figures give a lie to it. Indian economy is growing and at a comfortable clip, smartly recovering from the disruptions caused by at least demonetization, which was thought to have sapped the investment well-spring.
It is in this context that the most optimistic point to emerge is the issue about investment. The Economic Survey had noted and pointed out the need to step up investment in the economy. The Indian economy had grown best during the years of high savings and investment. In the last one year that appeared to be a dimming prospect.
Now this has seemingly changed. Gross capital formation is estimated to have shot up by 12 per cent. A vindication of this is to be found in another set of figures released almost simultaneously. The latest figures on the performance of the core sector gave reason to think that investment would surely have risen. Cement production showed a hefty growth this time which could not have been possible without a pickup in outlays on infrastructure creation and housing. These will in turn push up the demand for steel as well. Both these sector had shown happy tidings in the core sector performance figures. So far so good.
While it is good news that the gross fixed capital formation has improved and that too smartly for the quarter, the issue is how to sustain that level. On the face of it, the GFCF creation had been aided by the greater government spending on projects. This would have reflections on the annual deficit in the budget. Unless this is followed up by higher private sector investments, it will be difficult to maintain the level of economic activity. And here is the catch.
Already, prices are on the rise. Reserve Bank had set an inflation target of 4 per cent with a leverage of around plus/minus 2 per cent. The current level of inflation rate is in excess of 5 per cent and the budget could as well be somewhat inflationary. Government promises higher minimum support price for farm products. These are somewhat unavoidable with a general election around the corner. Fiscal deficit is also slipping which will add to the pressure. The question is will the RBI keep following a benign monetary policy with lower rates of interest or under pressure of rising inflation RBI would be obliged to jack up policy rates.
Surely an environment of rising interest rate would be inimical to higher investment. Larger government borrowing to fund its deficits would also add to interest rate pressure. In fact, the financial markets are already behaving as if these would be reality in the forthcoming months. How then to maintain high investment levels with these developments.
The task of economic management in the forthcoming months would be critical. The government will have to maintain prices in the face of numerous promises of appeasement to segments when finances are none too comfortable to make the two ends of government expenses meet.
Secondly, it would be a very difficult global environment in which India will have to make its own position. The United States has already kicked off a trade war in which China is apparently at the receiving end. Stiff tariffs are being slapped on items which China will likely try to dump on other countries than US. It would create an export-unfriendly environment for India. On the other hand, the domestic market is being serviced by imported goods. The imposition of tariff on imports would be handy for us, though current economic orthodoxy would squarely go against it.
These are times when orthodoxies should go out and pragmatism should come in. In the Mecca of capitalism, the USA has adopted policies best suited to their national interest irrespective of what purists had suggested. In the aftermath of the financial melt-down, the US government did not dither from pumping in billions into their beleaguered banks, turning them overnight into government-owned banks. That was unbearable to free market believers, but it saved huge inconvenience of serial bank failures and disruption of the entire financial system.
Till now we have managed to keep growing but as things grow increasingly complex in the coming months to maintain and sustain the growth of the Indian economy and to create jobs, pragmatic policies would be needed to be followed, irrespective of how obnoxious they are thought to be by academics. The national income statistics give pointers to these. (IPA Service)