The first-cut data on national income growth in the first quarter, showing a deceleration in the growth rate of gross domestic product to sub-eight per cent level, are along expected lines. India’s macroeconomic authorities have been warning that in fiscal 2011-12 the economy is likely to grow between 7.5 and 8.5 per cent. A variety of explanations can be offered for the slowdown, ranging from questions about the quality of data and changes in data computation methodology to global economic and domestic political factors. While the big picture is along expected lines, the sharp deceleration in the construction sector remains unexplained. To the extent that this is a response to monetary policy, not only is the deceleration to be expected, but it must also be condoned. After all, it was a stated objective of monetary policy that the observed increase in bank lending to the real estate sector should be squeezed a bit. However, this is unlikely to be the complete explanation. There may have been a deceleration in demand in key growth centres. For example, construction activity in the erstwhile boom town of Hyderabad was seriously impacted by the Telangana agitation. A similar decline in investment in real estate may have happened in some other cities owing to an assortment of political factors, ranging from the Adarsh Housing Society scam in Mumbai and the Lavasa project delay in Maharashtra to the judiciary’s interference in land deals in Uttar Pradesh and Haryana and so on. It is also possible that public investment in construction has come down owing to renewed concerns about fiscal deficit management. The deceleration in manufacturing sector growth could also have a negative effect on construction plans. A focused strategy to revive construction activity would help. The story in mining and quarrying, where growth has slowed sharply, would be similar.
Going beyond the construction and mining sectors, an important reason for the deceleration in growth at home, apart from global economic factors, seems to be the widely reported dampening of the “animal spirits of enterprise”. This would explain the deceleration in gross capital formation and the manufacturing sector slowdown. The problem with “animal spirits” is that though most economists and businesspersons know what they are, few can offer a credible menu and road map for their revival, apart from the usual mantra about interest rates. Successful politicians and policy makers are those who can alter the state of expectation for the better and help release the “animal spirits” of enterprise. The Manmohan Singh government did just that in the period 2004-08 when the rate of investment and savings rose sharply and the economy logged an average growth rate of nine per cent per annum. Fiscal reform, consensus on land acquisition policy, labour reform, facilitating private investment in food processing, logistics and supply chains, and liberalisation of investment policy in the strategic and defence industries could once again help stimulate the “animal spirits” of enterprise. Having exhausted the fiscal stimulus, the government is no longer able to spend its way back to higher growth. Working together, both the Congress and the Bharatiya Janata Party – which run most of the state governments – could alter the state of expectation by unleashing a slew of policy reforms. They can return to their political battles next year after getting the economy on track.
