Nearly three years ago I had noted that the period 2003-08 was the best sequential five years of macroeconomic performance that India had ever achieved, according to the usual criteria of growth, inflation, external balance, fiscal deficit and aggregate investment (“The halcyon years, 2003-08”, Business Standard, October 9, 2008). By the spring of that year the international commodity price shock had hit our country and in September the global financial crisis came to a spectacular climax. I ended my column on a nostalgic note: “Even as the economic indicators turn inexorably negative, let us not forget those halcyon years. Who knows when (or if) they will return.” Now, after three years, it may be instructive to take stock.
As readers may recall, after almost ignoring the distant thunder of the gathering financial storm right through the summer of 2008, contemporary commentators – including the World Bank, Goldman Sachs and Citibank – quickly went to the other extreme after the financial meltdown in America in September and predicted a sharp slowdown in India’s growth to below six per cent in 2009-10. As it happens, the Indian economy surprised most people by its resilience, thanks, in part, to the good old-fashioned, fiscal populism of spring/summer 2008 (well before the post-Lehman rationalisation of “fiscal stimulus”) and the Reserve Bank of India’s (RBI’s) adroit monetary and exchange rate management. True, growth slowed to 6.8 per cent in 2008-09. But it recovered quickly to eight per cent in 2009-10, confounding the tribe of pessimistic forecasters.
It would, however, be a serious error to think that we have emerged unscathed and are back to repeating those “halcyon years”. A glance at the accompanying table shows the clear worsening of our macroeconomic performance according to each and every significant indicator. Comparing the three pre-crisis years (column 1) to the three most recent years (column 2), it is evident that growth has slowed significantly, inflation has been substantially higher, the external current account deficit has more than doubled, and the combined (Centre plus states) fiscal deficit is 60 per cent higher. The rate of domestic investment has also fallen a little.
Purists may object that it is not fair to include 2008-09, the peak year of global financial turmoil, in the “after” period. Accordingly, the table includes column 3, which restricts the “after” period to 2009-10 and 2010-11. Doing so improves growth a bit but worsens inflation and the external deficit, with no change in the fiscal deficit and aggregate investment outcomes. Basically, the economy’s recent macro performance continues to remain well below pre-crisis levels on all counts.
One dimension of macroeconomic performance has been omitted from the discussion above, namely, aggregate employment. India’s employment data are woefully weak and incomplete. The overwhelming majority of the country’s labour force works in the unorganised or informal sector, with low earnings and high insecurity. That central fact has not changed over many decades. A few weeks ago the government released the National Sample Survey 66th Round large sample survey data on employment for 2009-10. Although total employment increased very little over the five years since 2004-05, some government spokesmen and analysts drew comfort from the decline in the unemployment rate (on a “current daily basis”) to 6.6 per cent from 8.2 per cent in the previous large sample survey of 2004-05. However, this may simply reflect a marked and surprising drop in the labour force participation rate (especially amongst females) over the same period. Besides, with only 15 per cent of workers being in “regular wage/salaried” employment, the unemployment rate is a poor indicator of trends in employment conditions.
| MACROECONOMIC PERFORMANCE BEFORE AND AFTER THE GLOBAL CRISIS | ||||
| Before 2005-08 -1 | After I 2008-11 -2 | After II 2009-11 -3 | Projected 2011-12 * -4 | |
| Economic growth (% per year) | 9.5 | 7.8 | 8.3 | 7.0-7.5 |
| Inflation (GDP deflator, % per year) | 5.5 | 8.4 | 8.7 | 7-8 |
| Current account deficit (% of GDP) | 1.2 | 2.5 | 2.7 | 2.5-3.0 |
| Combined fiscal deficit (% of GDP) | 5.3 | 8.5 | 8.5 | 7.5-8.0 |
| Gross domestic investment (% of GDP) | 36.1 | 35.3 | 35.3 | 33-35 |
| Gross fixed investment (% of GDP) | 31.5 | 30.8 | 30.2 | 28-30 |
| * Author’s projections Source: Central Statistical Organisation and Reserve Bank of India | ||||
Exports aside, the rest of the Indian economic data are not reassuring. According to the new index, industrial production growth slumped to 5.7 per cent year-on-year (YoY) in April-May, 2011 from 8.2 per cent in 2010-11, not to mention the high double-digit rates of 2005-08. Headline inflation (WPI) continued at nine per cent-plus in June and is projected to stay high through the next few months by both the RBI and the Prime Minister’s Economic Advisory Council (PMEAC), before declining to a 6.5-7.0 per cent range by March 2012. RBI estimates that the central government’s budgeted fiscal deficit will be overshot by a massive one per cent of GDP because of oil sector subsidies and related revenue cuts. These factors point to continuation of high short- and long-term interest rates.
High and rising interest rates are only one of several factors damping investment. PMEAC’s recent report highlights others, including: “the spate of corruption related controversies over the past one year”, bottlenecks in key infrastructure sectors of power, roads and ports, various restrictions on mining coal and other ores, delays in forest and environment clearances, shortages of skilled labour, and political uncertainties. The lack of meaningful economic reforms over the past few years is surely also relevant. The impact on investment is showing in the data. Capital goods production, which had surged at 30 per cent a year in 2005-08, grew by only 6.6 per cent YoY in April-May 2011. In the stock market, the pace of new issues has slumped. The HSBC purchasing managers’ index hit a 20-month low in July. Reports of delayed, postponed and cancelled projects abound. It is more than likely that the rate of aggregate investment in the economy will drop in 2011-12, with unfortunate consequences for growth in subsequent years.
As for projections of overall economic growth in 2011-12, while official agencies are still optimistic (RBI projected eight per cent in late July and PMEAC forecast 8.2 per cent more recently), investment banks have dropped their projections significantly over the past month (Morgan Stanley to 7.2 per cent and Citibank to 7.6 per cent).
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Taking all this into account, my own guesstimates for 2011-12 of key macroeconomic performance indicators are summarised in column 4 of the table. As for the years beyond, it depends mostly on the government’s ability to shake off the prevailing stasis and seriously implement its long-awaited reform agenda. The “halcyon years” show no signs of return as the global economy faces renewed stresses.
The author is honorary professor at Indian Council for Research on International Economic Relations and former chief economic adviser to the Government of India
The views expressed are personal