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From miracle to crisis

Hit hard by global woes and domestic problems, India’s economic growth rate slowed to a nine-year low, both in the March quarter at 5.3 per cent as well as in 2011-12 at 6.5 per cent. With inflation edging up and GDP slipping, India is sliding into a stagflation from which it may be hard to recover. Rating agencies are downgrading their forecasts for India’s growth towards six per cent.

Clouds over the economy are unlikely to dissipate soon. At home, the eight ‘core’ manufacturing and infrastructure industries, indicators of future performance, grew by 2.2 per cent in April, down from 4.2 per cent in the same month last year. Outside, the world economy is slowing down, so export markets will be slack. Exports in April rose by a measly 3.23 per cent, heralding tough times for exporters and continued pressure on trade balance. With a large current account deficit of four per cent of GDP, India needs to attract $50-70 billion of foreign capital a year at present oil prices. But international money is fleeing to the safety of places like Germany and the US, so there could be capital outflow, which could put pressure on the rupee.

Tragically, much of the injury is self-inflicted. The biggest factor behind the current growth weakness is uncertainty, which has led to a sharp fall in investment growth. Faced with mounting allegations of corruption and scams, the government has withdrawn into a shell and lost the stomach to take any decision posing the slightest political risk. The environment ministry suddenly became hyperactive and halted projects mid-stream. The resultant uncertainty was exacerbated by the finance minister and his tax police. For instance, even as the service sector has continued to be the only mainstay, Budget 2012-13 has introduced enough obstacles around it, like imposing tax on what it calls body shopping and changed definitions of royalty. At a time when every dollar matters, the government goes out of its way to displease foreign investors. Witness how Cairn was tormented, how Vodafone is hounded, how noises are made about Participatory notes (P-notes) used by FIIs with periodic regularity but without any clinching action or clarification.

As the crisis is not confined to a single sector, as problems on one front aggravate those on the other, there are no easy options and few well-defined solutions. High inflation makes cutting rates difficult as the fiscal response is still nowhere visible. As the rupee falls, RBI runs the full gamut of tough talks, policy changes and interventions on a meek scale, to finally admitting it cannot do much. A high interest rate environment makes investment costly, especially as the government can always shoot it down.

There are silver linings to these dark clouds. Oil prices have sagged below $100 a barrel on fears of a global slowdown. Commodities other than oil have also fallen. The rupee’s depreciation could help import substitution, aiding manufacturing sector. The last two quarters have seen some revival in gross fixed capital formation or GFCF.

What is lacking is leadership with a sense of purpose, direction and urgency. The government has very little time to reverse the slide. It needs to show that it grasps the seriousness of the situation; it must introduce crisis reforms, including in subsidies, foreign investment and cash-guzzling populist schemes.

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