State of Denial
Rajiv Kumar
The Chairman of
the Prime Minister Economic Advisory Committee (PMEAC) Dr. C. Rangarajan, was
quoted on 24th April as saying that the current (XII) Five Year Plan could
still see an average GDP growth of 8%!. During the interview, given after the
release of the latest Economic Review by the PMEAC, Dr. Rangarajan expounded on a lowering of the incremental
capital-output ratio (ICOR) resulting in higher growth in coming years. In
simple terms, he expects higher growth by a de-bottlenecking of large projects that
will bring down the ICOR. How one wishes
it was as simple as this to get us back to a higher 8-9% growth
trajectory. Similarly, when in July
2011, at a seminar organized by Suman Berry, then head of the IGC, I had
pointed out to the then Chief Economic
Advisor, Kaushik Basu, that investment was beginning to slacken dangerously, he
simply pooh-poohed the warning. We know what happened thereafter. Investment
tanked in India and Kaushik became the Chief Economist of the World Bank!
Clearly, there are advantages to being in a state of denial.
In the first
year of the Plan, i.e. 2012-13 economic growth will be no more than 5.2%. In
the next year (2013-14) it can at best rise to 6% for the following
reasons. Government expenditure will
necessarily remain repressed as the finance minister tries to bring fiscal
deficit below 4.8% of the GDP as he has targeted in the budget. So any hopes of
a pre-electoral splurge to boost aggregate demand, as was done in fiscal
2007-08 can surely be ruled out. The alternative is a hugely damaging credit
downgrade that we can ill afford. So government demand will not provide a
growth impetus. In fact, over the last quarter one has heard of increasing instances of non-clearance of
large volumes of government dues resulting in a significant negative impact on
cash flows and profitability of service providers and contracting companies.
From all
accounts private investment demand is unlikely to strengthen as the investment
climate continues to remain vitiated in major growth sectors like telecom,
autos, steel, power generation, highways, etc. Despite all the talk of reforms
since September, we have yet to see any real initiative that could boost investor spirits or promote
investment. Moreover, there is now an apprehension of a major slow down in the
real estate or the construction sector, which has provided a strong growth
stimulus in the past ten years. So private investment demand, which is the
strongest driver of growth, will remain weak this year. This is corroborated by
demand for non-food commercial credit remaining weak and a rising level of NPAs
in the banking sector.
There is hardly any reason to believe that
private consumption demand will reverse its current weakening trend and start
rising. Disposable incomes are unlikely to increase significantly in the
absence of large scale government handouts and continued weakness of employment
prospects. The on-going decline in auto sales, declining demand for consumer
durables and lower spend on consumption items like FMCG products and fast food
outlets are clear signs of continued consumer pessimism and the fact that the
mood in the country is distinctly downbeat. Finally, despite the recent feeble
uptick in export growth, and the fact that a lower base (exports actually declined
in 2012-13!) may provide a basis of higher growth in 2013-14, net external
demand is unlikely to emerge as a growth driver in the current year. A similar conclusion for a GDP growth of sub
6% in 2013-14 can be reached by looking at the supply side and considering
growth prospects in agriculture, industrial and services sector. Talk of 6.7 to
7% growth in the current fiscal is just wishful thinking.
With the first
two years of the Plan period achieving 5 and 6% rate of growth, the economy
will have to grow at more than 9% annually in the remaining three years of the
Twelfth Plan to achieve an overall average of 8% GDP growth. Even for an
average 7% rate of growth over the plan period, GDP growth will have to jump to
8% in 2014-15 and be sustained at that level. Given the onset of election
season in full measure from October this year, and the prospects of significant
political instability, it can only be as brave a man as Dr. Rangarajan who can
talk so confidently of the Twelfth Plan coming in with 8% growth rate. Should
there not be some accountability for government agencies to ensure that their
forecasts and pronouncements have are not completely out of whack from ground
realities?
Such facile talk
of higher growth rates is dangerous because it induces complacency when none is
warranted. There are 1 million (repeat 10 lakh) new entrants to our labour
force every month. These youngsters, who represent our much flaunted
demographic dividend, need jobs. Without, productive employment, they will add
to the hordes of urban lumpen class, which is now visible in all our
neighbourhoods and colonies except of course in Luteyns Delhi. They are all
aspiring for the good life, which they will seize by means fair or foul. In the
absence of jobs, they will earn their livelihood by joining the gangs of touts,
petty brokers, smugglers, real estate mafia. The luckier ones will pay hefty
sums to get in to the police force or other public sector jobs and then wreck
havoc on the civil society as they attempt to recoup the bribe they paid to
secure the prized 'sarkari naukri'. It
would be far more socially responsible for the government’s economic managers
to not show their state of permanent denial by constantly talking of higher
growth being round the corner, they should instead talk of the huge employment
challenge facing the country and the dire consequences of these young people
remaining unemployed and spilling out on the streets. This fear apparently kept
Deng Xiaoping awake at night and led him to initiate the Chinese economic
miracle. I wonder what apart from the fear of losing their jobs keeps our
economic policy makers awake at night!
_________________________________________________
Author is Senior
Fellow, CPR.
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