A separate harvest

There is more good news from the "real" economy, the production sectors, even as the fiscal numbers look worrisome. The economy is growing d...

There is more good news from the 8220;real8221; economy, the production sectors, even as the fiscal numbers look worrisome. The economy is growing despite poor governance and in the face of fiscal misgovernance, especially in the states, thanks to a good monsoon and the dynamism of domestic enterprise. The finance ministry has done well to draw our attention to the persisting fiscal hurdles in the form of food, fertiliser and petroleum subsidies. The inability of both the Union and state governments to improve their financial condition is a drag on growth because this continues to divert financial resources away from productive investment. The improved internal economic numbers are more than matched by robust external economic indicators. The sustained appreciation of the rupee is just another indicator of robust macroeconomic management. The Reserve Bank of India has come in for praise by western analysts for its mature management of the exchange rate and foreign exchange reserves. The reasonably good performance of exports in the face of the rupee8217;s appreciation is also an endorsement of the improving quality of Indian manufactures and the brand value of services exports.

While there is reason to celebrate the acceleration of economic growth this year, from last year8217;s 4.3 per cent to an expected 6.5 per cent, the transition to a medium-term growth path of 6 per cent to 7 per cent, not to mention the Tenth Plan8217;s targeted 8 per cent, requires an improvement in the financial health of the government and the public sector. Without this necessary fiscal stabilisation, it is difficult to realise the planned rate of growth, both because it imposes a fiscal constraint on growth and because it worsens the infrastructural constraint. Without increased investment in the economy it is not possible to sustain the present turnaround.

It is, therefore, not surprising that sovereign credit rating agencies continue to be wary of India8217;s overall economic outlook. They are well aware of our potential but equally conscious of what holds it back. Such concerns become more acute in an election year when populist pressures gain ground. Political research, however, demonstrates that most voters do not exchange votes for freebies. A subsidy dole-out is unlikely to yield rich electoral dividends unless the overall macroeconomic environment, especially the price and employment situation, is comfortable. To keep inflation low and generate more jobs, the government must invest more in infrastructure and development and even less in subsidies and on itself. Here there is little the finance ministry can itself do, apart from setting a good example on fiscal management, which it is trying to do in all earnestness. Much of the responsibility for overall fiscal stabilisation as well as battling populism devolves on the political leadership, at the Centre and in the states. A good monsoon and improved industrial performance provide the framework in which responsible fiscal management can stimulate further growth.