Growth Conundrums

Novelty, it seems, is difficult to sustain; so too economic growth. The unusualness that marked the Economic Survey two years ago has gone; the latest edition, that of 2011-12, parrots its previous issue on many a count. Of course, the official scrutinising of the economy on an annual basis in the Economic Survey has never been authentic – it is really about boosting “investor confidence”, and that is what it has done quite admirably. Overall, real gross domestic product (GDP) growth has decelerated over the first three quarters of the current fi nancial year. Growth of GDP at factor cost (2004-05 prices) in the last quarter of 2010-11 was 7.8%, declining in the first quarter of 201112 to 7.7%, to 6.9% in the second quarter, to touch 6.1% in the third quarter. Inflation still remains high; the slowdown in industrial growth persists; the growth rate of gross fixed capital formation has significantly declined, so have exports of goods and services in real terms; Brent crude oil prices are ruling exceptionally high; the current account of the balance of payments has deteriorated; net portfolio capital inflows are much lower than what they were in 2010-11; the rupee has been on a downward slide with sharp fluctuations, and net accretion to the foreign exchange reserves has been much lower than in the corresponding period of 2010-11. The authors of the Survey, nevertheless, in their wisdom, see an imminent upswing.

For them, fiscal consolidation is going to get back on track, inflationary pressures are about to ease in the coming months, the Reserve Bank of India (RBI) will then reduce interest rates and investment will become buoyant again. Their forecast of the growth rate of real GDP in the coming financial year, 2012-13 is 7.6% (+/-0.25%). Indeed, in the Ministry of Finance’s view, the economy will pick up momentum to record an 8.6% real GDP growth rate in 2013-14, back on track to the high growth recorded during 2003-04 to 2007-08. But, for this, in the view of the Survey the present policy paralysis has to be overcome. Just like information technology, business process outsourcing (BPO) and fi nancial services have been largely put outside the tax net, a similar enabling business environment has to be put in place for the manufacturing sector. More generally, a whole lot of “micro-foundational reforms” have to be brought about to achieve the “desired macroeconomic outcomes”.