State has dithered away

It is impossible to argue Q1 figures are always better. If anything, Q1 figures are a little below those for quarters that follow. We are almost certainly on a higher growth trajectory, to be further vindicated when Q2 figures surface in November. Some reasons for this are obvious. First, investment rates are increasing. In Q1 of 2007-08, and at constant prices, the investment rate is 29.6 per cent it is 31.3 per cent at current prices, higher than 27.9 per cent in Q1 of 2006-07. Again at constant prices, the savings rate has increased to 28.5 per cent in Q1. And there was gross FDI inflow of 19.5 billion in 2006-07, concentrated in manufacturing, computer services and financial services. This includes a swap of shares of 3.1 billion. Even if this is netted out, an FDI inflow figure of 16.4 billion is significant. Second, although one can8217;t establish this statistically yet, there have probably been efficiency improvements, measured by incremental capital/output ratio, both because of competition and restructuring and shift to services. There are studies floating around, suggesting lack of productivity increases in organised sector manufacturing. But there are several methodological problems with these and they don8217;t add much to comprehension, other than resulting in papers in academic journals.

Transport connectivity road, railways has visibly improved, though there are question marks on power. However, CMIE8217;s infrastructure index shows an improvement in June 2007 in electricity generation. Why shouldn8217;t these lead to productivity increases? CMIE8217;s infrastructure index shows an overall decline, but that is because of petroleum refinery products, coal, cement and finished steel. Third, notwithstanding regional variations and problems with mortality, morbidity and skill shortages, there is the demographic dividend. The percentage of population in working ages 15-64 is 62.9 per cent and is increasing.

National Sample Survey 2004-05 also shows an increase in annual rate of employment growth. Fourth, there is external trade, with exports in Q1 of 2007-08 accounting for 17.9 per cent of GDP. The global economy isn8217;t doing badly, so the demand side is fine. We have commerce ministry export figures without services for April-July 2007 and on the 2006 base, these show growth of 18.52 per cent in dollar and 3.10 per cent in rupee terms. There has been visible slowdown, beginning in 2006-07, but accentuated in 2007-08. More than 20 per cent rupee-term growth we should stop using dollars for trade figures added around 3.5 per cent to GDP growth historically, even in 2006-07, when engineering and petroleum product exports compensated for slowdowns in other categories.

But rupee appreciation is beginning to hurt now, depending on exchange rate sensitivity, and commerce ministry targets will go for a six. That doesn8217;t constitute a balance of payments problem thanks to capital inflows and service exports are a different matter. However, this contribution to GDP growth will become relatively less important. Fifth and finally, in our obsession with the central government, we not only forget that most reform areas are state subjects but that a succession of states have jacked up state domestic product growth rates 8212; such figures are now available till 2004-05. Despite the caveat about export growth, there is thus an India shining story and one shouldn8217;t forget that growth becomes difficult as bases increase.

The UPA seems embarrassed about this growth story and tries to play it down, because of the NDA hangover and because Leftist sentiments prosper on perpetuation of poverty. There is a temptation to be anarchist and argue the growth trajectory of 8.5 per cent if not 9 per cent is insulated from central government vagaries. Marx had forecast the state would wither away actually Engels said that. The central government hasn8217;t done that. It has dithered away. Forget governing 8216;the least8217;. Where do you see the government? It is non-existent.

There is some simplification in this anarchist diagnosis though. PPP is neutral to growth of around 9 per cent. Nevertheless, despite focus on states, the Centre can have a malign or benign effect. Because of PPP, we haven8217;t seen the benign effect. Otherwise, real growth would have broken into double digits. Infrastructure or better public service delivery or legal reforms would have done it. We saw a little bit of the malign effect, through perverse hiking of interest rates. There is almost perfect correlation between interest rate hikes and the UPA8217;s advent. An unanswered question remains. Why have interest rate hikes not hurt as much as they did in 1997, barring some specific sectors? The answer may have a lot to do with access to global capital and reduced role of borrowing in financing investments. Other than interest rate hikes, malign desires have so far been contained thanks to the Fiscal Responsibility and Budget Management FRBM Act. Probably no longer. Rumours point to early elections, without a full-fledged budget in 2008-09. That means we throw open the lid on FRBM, increase public expenditure of doubtful efficacy and announce implementation of recommendations of Sixth Pay Commission. So an unproductive asset UPA can display its skills of converting every asset into a liability.

With elections looming, there is an even more apt Engels quote. 8220;Everything must justify its existence before the judgement seat of Reason, or give up existence.8221;

The writer is a noted economist