The government’s spokesmen are busy issuing renewed statements of optimism, now that industrial growth in November has logged in at a pleasing 5.9 per cent — the highest in five months, and well above the sorry April-November average of 3.8 per cent. They concede that the October-December quarter will deliver poor GDP growth numbers, but expect things to pick up after that, with growth for the full financial year ending up between seven per cent and 7.5 per cent. No one is as yet willing to say that it might drop below seven per cent — which is apparently where the International Monetary Fund’s (IMF’s) experts have concluded the year will end, after the annual round of discussions with the government. It is nice to be optimistic and to believe in a brighter future, and there is a school of thought that says that businessmen are talking themselves into an excessively downbeat mood that is not really justified by the performance of the economy. But it is also foolhardy to misread the signs on the highway — as government spokesmen did repeatedly on inflation, only to lose credibility.
Rather than speculate on what future numbers might be, it would be useful to look at the factors that could help or hinder growth, and figure out how to deal with them. The Nobel laureate Michael Spence (of New York University, and head of the World Bank’s Growth Commission) made a presentation in Delhi this week, and outlined eight reasons why growth falters. India qualifies wholly or substantially on five of the eight: poor leadership, failures of governance, pursuit of objectives other than growth, low rates of public sector investment, and misguided strategy. Depending on where you stand on the inclusiveness debate (a reasonable take would be that poverty is coming down but inequality is going up), you could add half of the sixth reason: inclusiveness failure. That score is bad enough. What makes it worse is that three of the six are the contribution of the current government: a manifest lack of leadership, the surge in the fiscal deficit after 2007-08, and the pursuit of objectives other than growth. If corruption has become more endemic, you could lay some of the failures of governance too at this government’s door, though the problem itself is much older.
So what does that kind of score tell us about the future, and whether rapid growth can be expected to revive very quickly? Public sector investment is likely to stay low because there is no fiscal elbow room for expansion. Not only is the deficit level high, India’s public debt in relation to GDP is outsize — about twice as large as for most developing countries. Good fiscal management therefore should mean reducing fresh borrowing and controlling the deficit, which, in a context of multiplying entitlements, is easier said than done.
Then, the pursuit of objectives other than growth, designed to improve inclusiveness, is reaching a point where it is clearly counterproductive — and this is where misguided strategy becomes a factor. Inclusiveness could have been interpreted as capacity-building (public investment in agriculture is abysmal, and government spending on health care and education is also very low), rather than as hand-outs of one kind or another, so that it reinforced growth; but it is not to be.
As it happens, international observers have almost uniformly turned pessimistic on India. Whether it is Stephen Roach, Morgan Stanley’s long-time observer of Asia, or Jim O’Neill (who thought up the Brics acronym nine years ago), or analysts at the World Bank and the IMF, the message is the same: India has lost steam, it may even have lost its will to reform. The government could choose to disregard such commentators, but others will see the new scepticism as a warning signal.