In reverse mode

Despite lower forecasts for GDP growth from the Reserve Bank of India and the independent Centre for Monitoring the Indian Economy based on the first quarter8217;s performance, Yashwant Sinha remains upbeat. He thinks a growth rate of seven per cent can be achieved in the full year. Mid-term reviews of the economy have been known to go wrong, so Sinha is not the first finance minister to brush aside the bad news and try and talk up business confidence. But what do the facts really say? The Central Statistical Organisation8217;s estimates growth at 5.8 per cent based on a slowing down of growth in manufacturing, agriculture and services during the first three months of the financial year. While the RBI takes it cue from there for revising its estimates down to 6-6.5 per cent, it insists there is not sufficient reason to be worried and macroeconomic factors are sound. The CMIE adds its own inputs to CSO data and makes a more pessimistic forecast of 5.8 per cent. Its lower estimate of agricultural growth 1.2 per centas against 4.2 per cent earlier is particularly worrying.

Then again, another set of data which is just out do not suggest gloom is justified. Indirect tax collections for the first six months may not be remarkable but income tax collections which are 45 per cent higher than over the same period last year show that some sectors of the economy are buoyant. Contradictions abound in the assessments of global rating agencies as well. Standard and Poor8217;s lowers the country8217;s foreign currency outlook from positive to stable; Moody8217;s retains its positive outlook. Some may be inclined to look at all this picture and say the glass is half full, others that it is half empty. But one thing is clear and the associations of business and industry are making sure Sinha makes no mistake about it. The industrial slowdown looks like getting worse before it gets better. Pump priming has been proposed but is a short-term answer which, even if it were possible with the limited resources at the government8217;s command, would not address systemic problems. Protectionist pressure willincrease but should be resisted. It would be the short-cut back to past inefficiencies.

The facts are that in the midst of a capacity overhang, there is slackening domestic demand and no great push to export despite rupee depreciation. Several reasons would account for this. The general sense is that as global competition is becoming more intense Indian manufacturers are handicapped by the high cost environment they work in, high credit costs, high transport costs, low labour productivity. In short, reform has changed things only at the edges. Removing infrastructure bottlenecks has been the mantra for decades. But government investment in the infrastructure remains inadequate, and slow motion decision-making and antiquated legislation deters private sector participation. Labour reform is demanded but the government will be in no position to deliver unless a bold new approach towards unions is adopted. In countries where labour-management agreements have been thrashed out it has enabled new bursts of growth in industry.