Good old Keynesianism is back in fashion these days. Not so much in university campuses, where it had never really gone out of fashion, but in the more trendy precincts of the various chambers of commerce and industry. The government must kickstart growth is now once again a favourite sentiment expressed by spokespersons of the Ficci, CII and Assocham.
While die-hard neo-classical marketwallahs also worry about a persistent recession, they will not hear any talk of old-style Keynesianism and would rather see financial sector reform, more privatisation, less government borrowing, immediate capital account convertibility, depreciation of the exchange rate of the rupee and such like as the route to reducing interest rates and reviving growth. The more practical and desperate businessmen and their lobbyists, however, want a short-cut to industrial revival and think public investment in building roads is a good enough way of kickstarting growth.
The government must immediately announce a plan to build four-lane highways between the four metros says a senior representative of a leading chamber of commerce and industry, and implement the recommendations of the Pay Commission. This will revive the economy. Does he not share the finance ministers concern with renewed pressures on the fiscal deficit? No he says, there is a time to worry about deficits and a time to worry about growth. This is the time to worry less about the deficit and more about industrial slowdown.
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This view is echoed by a variety of economists. Speaking on Star TVs Business Agenda programme this week, economists Surjit Bhalla and Mahesh Vyas (the CEO of Mumbais centre for Monitoring Indian Economy, CMIE) argued, for different reasons, that the government should not be so obsessed with the fiscal deficit and should, instead, worry more about growth. Their individual recipes were different, but both were agreed that deficit control was not the key issue.
Latest sectoral trends analysed by the CMIE suggest that in 1997-98, macroeconomic growth will touch 5.5 per cent rather than the 7 per cent target forecast this week by the finance minister at his meeting with economic editors. The Reserve Bank of Indias annual report suggests overall growth may be between 6 and 7 per cent. CMIEs Mahesh Vyas disagrees. Agricultural growth is unlikely to be more than 0.5 this year, says Vyas, basing his statement on detailed crop-wise and region-wise analysis of kharif output trends and projection for rabi. Industrial growth, on the other hand, is expected to be around 6 per cent and service sector is expected to growth at around 7 per cent.
If the RBI and the finance ministry are expressing concern about the fiscal deficit, the reason should be clear. The denominator on which the fiscal deficit to GDP ratio is calculated, namely national income, is not going to grow at the expected rate, while the numerator is likely to grow at a faster than expected rate. The ratio that comes out in the wash doesnt look pretty.
At least one reason why the numerator is getting out of hand is the poor response of tax revenue collections to the liberalised tax regime. Notwithstanding the brave face put up by the flamboyant revenue secretary, N K Singh, at the economic editors conference, revenue collection so far suggests that the Laffer Curve has not been a helpful guide to tax policy this year. Not surprisingly, the finance minister is becoming increasingly strident in his exhortation to tax evaders to take advantage of the voluntary disclosure of income scheme.
Few now expect a 7 per cent growth rate to be notched up for a fourth year in a row, but that does not mean we are in trouble. Far from it. Even the 5.5 per cent growth rate this year, coming on top of three years of 7 per cent and despite a slowdown in industrial growth and indifferent performance by agriculture, is respectable enough. The ones who will be disappointed by this news are those who expected the Indian economy to take-off a la the East Asian miracle. However, the more realistic economists, aware of the constraints imposed by slow productivity growth in industry and agriculture and the likelihood of persisting infrastructural bottlenecks over the medium-term, project an average 6 per cent growth rate over the next three years. Not the impressive 7 to 8 per cent that India needs.
This view is once again substantiated by a recent study put out by the World Bank, Global Economic Prospects and the Developing Countries (1997). The report makes the flattering suggestion that in the first quarter of the next century, India will be one of the Big 5 developing economies, including China. Indonesia, Brazil and Russia. These Big-5 are seen to emerge as the key players in the world economy over the next quarter century. However, in the period 1992-2020, Indias average annual real GDP growth is expected to be 5.8 per cent, compared to Chinas 7.0 and Indonesias 6.9 per cent. This is a realistic assessment but by no means a modest one.
Indeed, even this years pessimistic scenario of 5.5 per cent growth would have been considered champagne-popping news barely a decade ago. The so-called recession everyone is worried about is also a state of mind. An annual rate of growth of 6 per cent, that too based on an outdated index of industrial production, which effectively covers barely a third of the industrial sector which bothers to report data, and does not include the burgeoning unorganised sector, is today viewed as bad news! The threshold of what constitutes good news about the economy has clearly moved forward.
That in itself is good news. But what it also means is that the born-again Keynesians in our chambers of commerce and industry are unlikely to get a sympathetic hearing at the finance ministry about their plans for building roads rather than bridging deficits!