The finance minister continues to be his usual optimistic self. Addressing economic editors on Monday, he projected 7-8 per cent GDP growth this year, decried talk of a recession, admitted to fiscal slippage, and maintained that India would remain the second fastest growing economy. Everything that Mr Chidambaram says may be correct, but it is just as well to recognise the risk that growth may slip below 7 per cent. The first quarter's GDP numbers have been reported at 7.9 per cent. The second quarter numbers will be out in a few days, and could well come in at over 7 per cent. But the economy has been losing momentum, and the second half could therefore see growth dip to even the 6 per cent region. This would not be out of line with world trends; the largest economies have all slipped into recession, and China has dipped to 9 per cent in the latest quarter (from 12.2 per cent a year earlier), and will slow down some more. If the situation is indeed going to get worse than what it is today, the question is what correctives should be applied. On that, Mr Chidambaram is not very forthcoming.
The finance minister's pronouncements in recent days have focused on encouraging businessmen to boost sales by cutting prices--which businessmen will do only if they have no choice. Earlier, the government talked of pumping up infrastructure spending, but given time-horizons and competencies, this is not a convincing corrective for the current downturn. From the Reserve Bank, there have been modest interest rate cuts and an easing of liquidity, but real interest rates (net of inflation) remain very high. There is reluctance to drop the rates further and also to release more money into the market, for fear of what that might do to the rupee's external value; in fact, rates for non-resident Indians have been raised in an effort to get in more dollars. In juggling the different balls that are in the air, the danger is that those in charge of macro-economic management end up not doing enough.
The government has already shot its fiscal bolt--the loan write-offs, the Pay Commission pay-outs, and the oil and fertiliser subsidies. With demands for grants being an extra 2 per cent of GDP, and with 0.6 per cent of GDP having been given up through tax cuts, the deficit this year may go back to what it was when this government started out (over 4 per cent of GDP). That is not necessarily something to be decried at this juncture, especially since the sharp fall in oil prices has helped control the oil and fertiliser subsidies.
What might be tried is to spur private sector investment and consumption; steps in this direction are more likely to succeed than the efforts to boost government investment in infrastructure, and could be attempted through a combination of tax cuts across the board (not selective favouritism), further interest rate cuts, and another reduction in the cash reserve ratio. If done as concerted action, it could change to some degree the psychology of gloom that has set in, though no one can be sure. After all, the forecasts are that this downturn will be longer and deeper than most previous ones. That suggests a bleak outlook for the next financial year as well--and the prudent thing is to anticipate events and take advance action now.