Killer inflation
The most immediate stress point for the economy is inflation. It has been relatively moderate in the last four months, but that is mostly due to the seasonal effect of higher vegetable availability. Inflation has spiralled over the last seven years largely on account of food items, especially of fruit, vegetables and milk. The lone voice of this columnist from 2008 onwards is now the accepted wisdom, since the inflation proved to be stubbornly persistent despite all the monetary policy tools employed.
Summer signals a rise in prices. Vegetables now cost as much as or more than they did a year ago. Given the crop damage due to unseasonal weather last month, prices will likely continue their upward march over the next six months. Neither monetary tools nor the BJP-proposed price stabilisation fund would help alleviate it. Improvements in infrastructure and transportation, as frequently suggested, are medium-term measures. The new government will have to think out of the box, and quickly at that, if its honeymoon is not to be soured in a hurry.
Mounting subsidies and deficit
Come May 16 and the treasury benches will almost certainly discover the coffers already emptied or committed. Despite the legerdemain of the outgoing finance minister, P Chidambaram, the fiscal deficit for 2013-14 will most likely exceed the budgeted 'red line'.
The incoming finance minister will in all probability follow the time-honoured practice of political and business executives of laying all their ills (and then some) at the doorsteps of the previous incumbents, but that offers no remedy. Debt must be serviced, salaries and pensions paid, dues of oil marketing companies met, and commitments for myriad social and economic expenditures (MNREGA, food security, support prices) honoured to retain government continuity and credibility. And all this must be managed from static, if not lower revenue. The imminent railway deficit will also add to the pressure.
A new government, especially a coalition one riding on the wave of dissatisfaction with the previous one, cannot very well begin by advocating even a modest austerity drive, without antagonising its constituents and the public that voted it to power. Blaming the previous government gets only so much traction, but nowhere near enough to replace subsidised prices by market-based user charges or paring down entitlements. Little scope exists for further reducing capital expenditure or development outlays, already slashed ruthlessly in the last two years.
Dodgy growth
These constraints would further hamper the stressed growth scenario. With government and household savings both scrimped by their shallow pockets, foreign investment, direct and indirect, would become increasingly the source to revive and sustain growth. That may happen following the enthusiasm generated in the aftermath of the election results, but its continuation remains in the realm of a hope and a prayer. Given the drubbing India received in the last half year, earning it the dubious distinction of membership of the Fragile Five, the best that can be said is that even with the expected election outcome, it will remain a modestly attractive international investment decision. The likelihood of its becoming the flavour of the month is remote, and as a consequence, even an eight per cent annual growth is a distant dream. Note that the best growth estimates for the current year do not exceed 5.5 per cent, which will likely emerge as our new Hindu rate of growth.
Demographic dividend or time bomb?
That in turn has consequences for a principal reason for the likely change in India's political dispensation. All parties have realised that despite growth, job creation has been inadequate. Agriculture continues to be the employer of last resort, in reality disguising unemployment. Restless youth voting for change naturally have high expectations of finding not just any job, but better paying ones with good prospects.
A large, labour-intensive manufacturing base, as proposed in most manifestos, could provide a solution, but it has two pre-requisites: sufficiently large demand, whether domestic or international, and a dependable skill base. Presently, India lacks both. The world demand for clothing, footwear and other items of personal consumption, requiring relatively low capital investment, has fallen off the peak it enjoyed in the previous decade. China began its upward march under similar conditions, but three decades ago. That, plus unqualified and seemingly inexhaustible state support enabled it to acquire and cement its position as the world's factory. As a latecomer, India has to try harder and compete with countries such as Vietnam, which already have a leg up. Improvement in skills still remains in the realm of wishful thinking. It requires no Cassandra to foresee that today's hope can be tomorrow's explosive anger if it is not fulfilled. The Arab Spring had its roots in similar circumstances. It has now turned into a roiling summer of unmet expectations. Turkey, Brazil and South Africa, our benchmates in the Fragile Five dugout, have all experienced sporadic urban unrest that can be traced to the same causes.
To summarise, the new government will confront four formidable challenges: keeping prices under control so as not to singe the people and itself; working its way out of a near-impossible macro policy mess; getting the growth momentum going in an uncertain global environment and meeting the sky high expectations of an aspirational youth boxed in by jobless growth. Even under the best of circumstances - and the present ones are far from it - they would require economic management of an exceptionally high order. The grand visions of the manifestos - bullet train quadrilateral, string of ports, integrated Himalayan development plans - all require considerably greater economic stability and not mere optimism to implement them.
"Ek Bharat, Shreshtha Bharat" (One India, Great India) is the catchy BJP slogan. Whether that becomes our manifest destiny depends on hard-headed determination to face economic realities.
The writer taught at the Indian Institute of Management, Ahmedabad, and helped set up the Institute of Rural Management, Anand