The finance minister faces an unenviable challenge. He has to find resources for both higher public investment and a quantum jump in pay and pension provisions in the Budget. He has to boost growth sentiments, win the confidence of foreign investors and encourage savers to enter a capital market in the grip of bears. He has to rescue banks that are carrying a large burden of non-performing assets. He has to satisfy populist demands for more welfare spending. And, all this in a global economy facing rough weather. On Budget day we will find out how he manages to juggle all these balls without fiddling the numbers.
The goal of boosting growth sentiment is the most crucial - and the most difficult. But why should growth pessimism be so widespread in a country which claims to be growing at seven per cent-plus? Part of the answer lies in the difference between real and nominal growth. Corporations, entrepreneurs and households judge their own prospects by the growth in nominal incomes. Falling wholesale prices have led to a negative deflator and this fiscal year, in the nine months from April to December, the growth in real GDP was 7.3 per cent, more or less the same as last year, but the growth in nominal GDP was 6.8 per cent as against 11.7 per cent last year. The difference between real and nominal growth in income is particularly marked in mining (6.9 per cent and 3.7 per cent), manufacturing (9.5 per cent and 8.1 per cent) and commercial services (10 per cent and 6.8 per cent).
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Corporate investment is being held back by a perceived slowness in demand growth. This directly affects capital goods producers. Exports have fallen for over a year now and there is no quick prospect of a revival. Growth is also sluggish in the rural demand for consumer goods and the middle-class demand for durables and housing that had fuelled the earlier boom. The primary macroeconomic challenge is to change this sentiment through public investment that can kick-start the revival of demand growth and private investment.
There is another deeper reason for focussing policy more sharply on boosting domestic demand. It is quite possible that the world economy is entering a more prolonged phase of slow growth, as some analysts have argued. Some of this is a tendency to project a continuation of present conditions of slow growth, because the traverse to a higher growth path is not at all obvious. But the concern has deeper roots in the West. Thoughtful commentators, instead of being concerned with stabilisation about a given trend, are looking at the looming threat of secular stagnation in developed countries because of the inability to revive demand growth even with near-zero and, now, negative interest rates. If people don't spend when you charge them money for not spending, something is going on which standard economics cannot comprehend.
This syndrome has also led to a revival of academic interest in theories about long economic cycles stretching not over years but over decades. The most prominent of these is the cyclical path of the economy under the influence of major technological innovations. This was christened the Kondratiev wave by Joseph Schumpeter, who saw technological obsolescence and development as the main driver of long-term economic dynamics.
There are many different ways in which the growth experience since the start of the industrial revolution has been presented as a series of Kondratiev waves, typically with four phases. The first phase sees the emergence of some game-changing technology that leads to boom conditions in a second phase, followed by a third phase of matured growth at a lower pace - and then a slowdown and even stagnation till yet another game-changing innovation restarts the process. In terms of the driving technologies, one plausible explanation puts the sequence as the steam engine/cotton at the start of the industrial revolution followed by railways/steel, electricity/chemicals, petrochemicals/automobiles and, most recently, information technology - all roughly at 50-year intervals beginning in 1800.
The fear of stagnation arises from the belief that information technology developments are now incremental and not transformational, and the next game-changing technology is not yet in sight. There are some plausible candidates on the horizon: renewable energy and smart-grid electricity, biotechnology, new materials and manufacturing processes, for instance. But they are not yet in a position to drive the investment process into a higher gear in the countries which are already at the current technological frontier. Of course countries like India and China, which are below this frontier, can still grow fast as they catch up technologically with the rest. What they cannot count on is booming demand in the mature economies.
There are other factors that point to slow growth as the new normal in the rich countries. One such factor is what could be described as the growing demographic deficit: an aging population that requires a growing proportion of national income to be devoted to pensions and health care. Perhaps it also leads to a growing conservatism not just in politics but also in economic behaviour. The high-income OECD countries that face this demographic future account for two-thirds of global income at market exchange rates and half at purchasing power parity rates. China, which has been the main driver of global demand growth, will soon face a similar prospect.
India must look inward for demand growth in the medium term without becoming protectionist. This requires more than pump priming investment. Inclusive growth that provides skills to the demographic dividend cohorts, improves logistics to spread growth to all parts of the country and creates jobs is necessary not just for social and economic equity but as a mainspring for growth. Investing in technology development is essential not just for self-reliance but to be ready to surf when the next global Kondratiev wave starts.
So, while monetarists will judge the Budget by the deficit number and Keynesians by the increase in public investment, unreconstructed planners like me will look for measures to boost technology development, skills and job creation.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
