The growth of the Indian economy has slowed down and is likely to decelerate further. The government has curbed exports, eased imports, tightened money supply and hiked interest rates. Yet inflationary fires continue to rage.
Although the long term future is far from bleak, in the short run the picture appears rather gloomy. It is certain that the political impact of the current state of the economy will not favor the incumbent regime in the coming months.
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| Paranjoy Guha Thakurta |
For the first time since the country became politically independent more than six decades ago, India’s gross domestic product grew by an average of almost nine per cent each, for four years in succession. In the past, India’s GDP had grown fast in particular years but this was usually preceded (and often followed) by a year of negligible (or even negative) growth. The late Professor Raj Krishna had coined the phrase “Hindu rate of growth” to highlight the fact that the Indian economy had grown by an average of only around 3.5 per cent right through the decades of the 1950s, 1960s and 1970s despite specific years of high growth.
From the 1980s onwards, the growth rate picked up and then accelerated during the 1990s. It is nobody’s case that India would slip back to the era when the economy grew very slowly. It should also be realized that growth in itself means little or nothing unless it is accompanied by the creation of job opportunities and the benefits of growth benefit the underprivileged. The Prime Minister and the Finance Minister are today being criticized (privately by even their own party members) because many of the market-friendly, neo-liberal economic policies that have been followed in the past have not been considered sufficiently “inclusive”. Dr Manmohan Singh’s economic policies were attacked in May 1996 as well after the Congress fared badly in the general elections.
What is clear at present is that the Indian economy will grow by less than eight per cent during the current financial year that ends in March 2009. The Prime Minister’s Economic Advisory Council has placed this figure at a more precise 7.7 per cent, although the Reserve Bank of India as well as the Ministry of Finance are of the relatively optimistic view that the growth rate could still be maintained at eight per cent. This optimism stems from the belief that this year will witness record agricultural output despite the floods in many areas of north and north-east India and inadequate rainfall in parts of central India.
The government is also hopeful that buoyant farm production will dampen inflationary expectations before the festive season. However, such an expectation may not materialize for more than one reason. At the time of writing in late-August, the official rate of inflation as measured by the wholesale price index (that is a rather imperfect indicator of the cost of living) had crossed the 12.5 per cent mark, the highest level in the last 13 years, that is, since May 1995, the last year when the current Prime Minister served as Finance Minister in the PV Narasimha Rao government.
The current inflation rate is unlikely to come down substantially because of what number-crunchers describe as a “base effect”. Since the index is being compared point to point or the value of the index on a particular Friday is being compared with where the index was a year ago, the position of the index 56 weeks earlier matters a lot. Since inflation was at a particularly low level in the second half of 2007 and had touched a low of 3.6 per cent in December, the rise in the index this year is certain to be high in the coming weeks and months. The PM’s Economic Advisory Council has warned that the inflation rate could touch 13 per cent in the coming weeks.
Another reason why the inflation rate may come down is related to what economists call the “demand pull” factor—the government has decided to increase the salaries of 5.5 million government employees (including police personnel and those from the defence services) by an average of 21 per cent, more than what had been recommended by the Sixth Central Pay Commission. More than the salary hike, these employees will be paid salary arrears for a period in excess of two and a half years. What will happen is that a sum of roughly Rs 13,000 crore (or 60 per cent of Rs 22,000 crore) will suddenly reach the hands of this section of the population, and not surprisingly, much of the money may be splurged during the coming festive season.
Even if those belonging to the urban middle classes understand that much of the inflation that has been witnessed in the recent months is of the imported variety, specifically on account of high world prices of crude oil, they are also aware that their real rates of return on investments in banks and most financial instruments have turned negative since nominal rates of interest are lower than the inflation rate. The economy seems to have entered (at least, temporarily) a vicious cycle: high interest rates threaten to further slow down industrial production and growth has had to be sacrificed at the altar of inflation control.
There is no doubt that high food prices is going to be the single most important issue that would influence the electorate, not issues such as political stability, communal harmony or, for that matter, ‘energy security’ in the form of the nuclear agreement with the United States.
The author is an educator, an economic analyst and a journalist with over 30 years of experience in various media—print, radio, television, Internet and documentary cinema.
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