The good news is that the Indian economy is likely to grow at around 8 per cent in fiscal 2011-12. The bad news is that the Indian economy is likely to grow only at around 8 per cent this fiscal. The other good news is that India, along with China, Brazil and a few other emerging economies, is likely to be among the fastest-growing economies in the world. The bad news is that with 8 per cent growth, Finance Minister Pranab Mukherjee will have to re-work his Budget arithmetic that was based on a 9 per cent rate of growth. There are no surprises in the reports emanating from the International Monetary Fund (IMF) on the eve of the Fund’s annual spring meetings, but these reports, especially the Fund’s fiscal monitor, draw attention to the need for sustained fiscal consolidation and inflation expectations management in India.
When Mr Mukherjee presented his Budget, many informed analysts, including this newspaper, expressed scepticism about the fiscal projections made at the time. It is now increasingly clear that the Union finance ministry was being excessively optimistic projecting a 9 per cent-plus rate of growth. Chances are the number will be closer to 8 per cent, which is also a good number. Hence, rather than worry overly either about “over-heating” or “slowing down”, the right lesson to draw would be to rework the fiscal numbers and arrive at a more meaningful fiscal consolidation strategy based on the assumption of lower growth. The threat of high global oil and food prices should make the government sit up and take a more realistic view on growth-inflation dynamics. If the finance ministry can ensure better fiscal consolidation and enforce stricter monitoring of spending, the government should be in a position to adhere to fiscal parameters even if growth rates slow down.
The urgency and importance of fiscal stabilisation are underlined by the fact that the Reserve Bank of India’s (RBI’s) households’ inflation expectations survey, conducted in December 2010 across 12 cities, shows persistently high inflation expectations. An important reason for this seems to be the widely-shared view that not only has the RBI not done enough, but even the government has not done enough. The numbers may be partly dated since the survey was conducted towards the end of the previous calendar year, when high food inflation shaped overall thinking about inflation. More recent data suggest a slowing down of economic activity and, hence, a possible cooling down of the economy. India need not panic, but it must get realistic, both on growth and inflation, and take appropriate policy measures. If the economy can sustain 8 per cent growth with 6 per cent inflation, the only thing to worry about would be getting public expenditure in line, to keep the deficit numbers down. That remains the macro-economic objective for this fiscal.
It is neither India nor any of the other BRICS economies – Brazil, Russia, China and South Africa – that ought to worry the IMF as much as the OECD economies. IMF must do more to improve economic governance in the US and the European Union. Economic mismanagement in the West poses a bigger threat to the world economy than weak policy reform in BRICS.