Government must first acknowledge that the main problem is policy uncertainty
What will it take for the government to wake up from its complacency about the India growth story? GDP growth for the fourth quarter of 2011-12 crashed to 5.3 per cent and pulled down growth for the year to 6.5 per cent. With inflation edging up and GDP slipping further,India is sliding into a growth stagflation from which it may be hard to recover. The government has ignored all the warning signals. It has stubbornly refused to even acknowledge the problem so far,attributing it to Greece,rainfall,speculation or the villain of the day. Financial markets,and especially the rupee,have been falling sharply,indicating that macroeconomic fundamentals like inflation and fiscal deficit are causing weaknesses. The government has tried to manipulate the message by RBI intervention and capital controls. With the government in denial mode,there has been no policy correction. In fact,more macroeconomic distortions have been introduced.
The biggest factor that has resulted in todays GDP weakness is uncertainty which has led to a sharp fall in investment growth. This includes both policy uncertainty,exacerbated by the finance minister and his tax police in an effort to grab the greater share of a shrinking pie,and by the environment ministry that halted projects mid-stream,and scandals. Inflation,particularly in consumer prices,has been inching up,but the government either ignored it by talking about the WPI or provided new excuses for its rise.
Instead of allowing the petroleum minister to say that there will be no correction in diesel and kerosene prices,government must declare how it will move to market prices,and correct the fiscal deficit. It must announce steps to improve the investment climate. Instead of getting the RBI to cut interest rates when inflationary expectations are high,government should focus on reducing inflation by cutting the fiscal deficit. No country has seen high growth in an environment of even moderately high and volatile inflation and policy uncertainty. India is unlikely to be the first.