Friday, May 31, 2013

GDP growth tumbles, but India hardly alone….

The GDP grew by just 4.8% in the 4th quarter of the last fiscal. Though this was widely expected, it still caused a lot of shock. The stock market crashed by 450 points, partly because of the GDP growth rate, and partly also because of the comments made by the RBI, suggesting that rate cuts might be difficult in the near future. The whole thing has spread more gloom into the economy.

And yet, it’s important to see the picture correctly. Yes, the growth is down dramatically from the 9.3% we hit in FY11, just 2 years back. Yes, its even lower than the 6.2% growth we hit last year, in FY12. The 5% growth of FY13 is shocking, like I said earlier, but it’s still important to see it in the correct perspective. India is not alone in this gloomy scenario. Every country in the world has seen declining growth rates. Most importantly, all its peers in the BRICS grouping have seen growth rates plummet. And even Indonesia, the “I” that was being thought of as being a replacement to India in BRICS has seen its growth slow down to a 2-year low.

For the record, Brazil has grown by just 0.6% in the Jan-March 2013 period and by 0.9% in the full year (2012). Russia has grown by 1.6% in Jan-March 2013 and 3.4% in CY2012. South Africa has grown by just 0.9% in the Jan-March 2013 period and by 2.5% in the full CY2012. Even China, the indefatiguable behemoth, whose economy is driven largely by investments (not consumption) has seen growth slow down to 7.7% in the Jan-March 2013 period and probably lower in CY2012. What is worse for China is that this represents a fall from the previous quarter (7.9%), while for India, the solace is that the growth rate is marginally higher than the previous quarter (when it was 4.7%). Seen in the correct perspective, India’s results are not that bad.

Of course, India’s compulsions, and opportunities, to grow are much higher than those of other BRICS nations. All the other countries have a better per-capital GDP number than us. In fact, by a mile. India is the only poor country in this grouping, and hence we should worry about this development. It’s important to analyze the real reasons for this slowdown, so that suitable corrective actions can be taken.

In my mind, the biggest reason for the slowdown is the policy paralysis that gripped the country for nearly a year and a half between Anna’s first hunger fast and Chidambaram’s taking over. My complaint with Anna’s fast always was that it harmed India more than it benefitted it. It made bureaucrats wary of taking decisions. It put too much premium on “perceived” honesty, and too little on “decision making”. Bureaucrats, and politicians, who did nothing and took no decisions (like Antony) were rated much higher than those of the opposite kind (Praful Patel, hauled up for taking a “quick” decision on buing Airplanes for Air India – he took just 17 months). It brought in a culture where everyone was presumed guilty. It generated a mob frenzy, an assimilation of energy, but of the type that disintegrated the growth story, not made it stronger.

The other contributor to the policy paralysis of course was the unbelievably incompetent CAG. He brought out bizarre numbers….and even more bizarre concepts (notional loss)….and never heard of before calculation methods, giving even the most basic of accounting norms the go by. In an interview with Karan Thapar the other day, when it was pointed out that in 2004, the government had merely approved “in principle” that coal mines should be auctioned, but it took until 2012 to get the approval implemented, the CAG’s reply was “we go by the in-principle approval”. This alone should prove where the CAG’s heart lay. He has been a career bureaucrat. He should know how much he himself must have taken in getting anything through the bureaucracy after it had been decided on. The CAG is personally responsible for the miserable state of affairs in the telecom industry, and the coal sector.

Apart from policy paralysis, there was also the recalcitrant attitude of the RBI in its monetary policy. It never could understand that the inflation the country was seeing this time around was “beneficial” inflation – in the sense that the poor were getting more money in their hands and causing the inflation – and not hurtful inflation. The RBI Governor responded in the only way he has learnt. Clerically. He kept increasing bank rates, squeezing the industrial output down to near zero (and in fact, negative in some quarters). It’s impact on inflation itself was obviously zilch. Inflation continued to soar, and industrial output continued to plummet, leading to real fears of stagflation. Subba Rao may want to mull about the fact that inflation actually tapered off after he started cutting interest rates, though obviously, there were other contributing factors.

Then there is also the nature of our politics that had its role to play. The BJP opposed everything, under the pretext that it is the opposition party. What kind of logic is this? Then the compulsions of coalition politics, where regional allies want to dictate foreign policy, and where Anna-style “my way or the highway” politics is par for the course. India has a big struggle ahead. Ahead of 2014, since the political situation is not expected to improve. Coalition politics – and the most vicious forms of it – are expected to continue for some more time.

The government had its own failures. The environment ministry – no matter who heads it – has always been a roadblock towards economic progress. There are apparently hundreds of projects stuck in the pipelines because it looks like the planet’s burden of managing its environment is solely on India. Hopefully the recently constituted Cabinet Committee on Investmentts (CCI) will now twist Jayanthi Natarajan’s arms a little. There is a lot of good work happening in the background. The Aadhar program should make subsidies better targeted, and cut corruption. The Land reforms bill should give industry a clear policy on land acquisition. The cooling commodity prices worldwide should help ease pressure on the CAD, and help reduce interest rates. The good monsoons should help ease agricultural prices, and increase growth rates. In think the next year will be better, but we still have work to do.

The real truth is that FY13 GDP numbers are disappointing, but hardly disheartening. The world is in chaos, but is recovering. India is well placed to tap this growth opportunity. With or without its destructive political set-up.

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