The writing has been on the wall for a while. So, it was not surprising to see the government forecast for growth this year to be a shade below seven per cent. But just because the numbers weren’t unexpected, it doesn’t make these any more palatable. Not only is this a significant moderation from the eight-plus per cent growth in the last two years but, barring the global financial crisis year of 2008, it would be the lowest in the last nine years and a significant climbdown from the nine per cent growth implicitly built into the Budget — a disappointment by any yardstick.
In sport, they say occasional losses are more valuable than wins because they help one identify areas of weakness. The real question is whether policymakers will learn from this growth disappointment. It would be enormously tempting to blame this performance on “unhelpful global economic conditions”. But this would be a gigantic misrepresentation. Yes, export growth has slowed, but gross exports are still growing twice as fast as gross domestic product. Net exports will be a drag on growth, but that is because import growth continues to remain buoyant, reflecting domestic supply constraints and the desire to hold gold as a hedge in the wake of stubbornly high inflation.
The real issue, of course, is investment, which propelled growth in the last decade and has ground to a halt, reflecting the myriad governance issues that are well known. More important, the investment slowdown began when policy rates were 200 basis points lower. So, to expect a few rate cuts by the Reserve Bank of India would turnaround the investment cycle is to miss the forest for trees.
Instead, the answer lies squarely with the government. The next few months would present authorities with a unique opportunity. After the state assembly elections, can authorities deliver on credible fiscal consolidation which rationalises subsidies and frees resources for the private sector? Can authorities make real progress on streamlining land acquisition? Or rationalising the coal-power linkage? Or pushing through with the spate of financial bills in Parliament? Or re-introducing foreign direct investment into multi-brand retail to signal a statement of intent? Answers to these questions would determine whether seven per cent growth this year is an aberration or the start of something more ominous.
Sajjid Chinoy
India economist, JP Morgan
