When I read what politicians are saying and reportedly thinking,I am afraid that,as in 2009-10,they will become complacent and ignore the need for continuing reforms over the next three years,and permanently lose the opportunity of restoring growth to its medium-long term potential of 8 per cent to 8.5 per cent. When I talk to people from the world of business and private equity (the long term investors),I often find deep despair about government actions,and inaction,that have stymied the growth of output and investment in the recent past. I fear that their pessimism will slow the pace of recovery even if the political system produces genuine reforms of the permit-inspector raj. Both the over-optimism among politicians and the excessive pessimism among business and industry can be bad for economic recovery. We need a realistic balance between the two if we are to get a reasonably quick as well as a sustained recovery.
Two projections for 2012-13 from the economic survey encapsulate the negative story. One is the current account deficit,at 4.8 per cent of the GDP,and the other is the growth rate of gross domestic product at constant market prices (GDPmp),at 3.3 per cent. These are both unprecedented and unsustainable numbers. The growth projection of 5 per cent for GDP at factor cost (GDPfc),which shocked many observers,is about 1.8 per cent point higher than the number for GDPmp. We last had such a low growth rate for GDPmp during the balance of payments crises of 1991-92,when it plummeted to 1 per cent. The CAD of 4.8 per cent has no historical precedent; the worst historical CAD was 3 per cent of the GDP in 1990-91,when the BoP crises started. The high inflation rate,best captured by a five-year 9 per cent average rise in the implicit GDP deflator for private consumption,is another symptom of macro-economic imbalance. However,it is still lower than the nine-year average of 9.9 per cent from 1990-91 to 1998-99,following the BoP crisis.
Despite underlying imbalances that look as bad as,or worse than,before the 1991 crisis,there has been no crisis this time. The reason is the foreign exchange,trade and capital flow reforms of the 1990s,which have allowed the economy to adjust without getting into a full-fledged crisis. But the underlying problems still need to be addressed,especially if they are to be prevented from being a drag on the economy or if they result in an even bigger BoP crisis a decade later. Fortunately,because of the reforms of the 1990s,we now have more time to address them. The 1990-91 crisis showed that a combination of macro rebalancing and structural reform could correct the macro imbalances and put us on a higher growth path than that of the 1980s. The former involved a classic expenditure (fiscal deficit) reduction cum expenditure switching policy of real depreciation,which got us out of the 1990 BoP crises. Intelligently adapted to current economic conditions,including a much more open economy,it can still bring results.
The Indian economy looks better from a medium-term global perspective. India is currently one of only seven countries,out of around 250,in the world with an average per capita GDP growth rate of over 6 per cent in the decade leading up to 2012. The ratio of Indias GDP growth to the growth of world GDP has shown virtually no change since 1994. In other words,India has maintained its growth performance,relative to the world economy,since 1994,even though in any given year it may have performed better or worse. Similarly,the ratio of the Indian economys growth rate to that of Chinas has been rising since 1994,as Chinas growth slowed,relative to the world economy. This trend rise in Indias growth rate,relative to Chinas,is very modest. From about 60 per cent of Chinas growth rate in 1994-1995,it went to about 80 per cent in 2011-2012. From this global medium-term perspective,2012 is a bad but not unprecedented setback,from which we can still recover if we take the necessary corrective steps over the next three years.
There is need for policy,regulatory and institutional reforms. Part of the extreme business pessimism stems from the fact that one of our most cherished beliefs,since the 1991 reforms,has lost its credibility. When reforms slowed after the initial burst in 1990s,we in the ministry of finance used to tell foreign investors that the pace of reforms and the sector preference may vary with every government,but no government,including the Left Front,had reversed any reform. Gradually at first,then more rapidly,negative practices of the old licence-permit-inspector raj have returned,in sectors or areas still under the control of the government. Whether this happened inadvertently or deliberately,it has affected both domestic and foreign investors in the real economy and is a factor in the investment collapse. It needs to be corrected through regulatory and institutional reforms. Dont be misled by the FIIs lack of concern on this score,as short-term investors are quite happy to profit from the high interest rates,compared to the US,Europe and Japan,and finance the high CAD for now.
In conclusion,the Indian economy is not doing as badly as investors in the real economy think,nor is it as good as many politicians and political advisors think. The government must not abandon at the first sign of recovery its efforts to correct the imbalances and bottlenecks that have arisen. The real economy investors must shed their pessimism,as the government makes genuine efforts to restore growth and start investing,so that the long-term growth trend is restored reasonably quickly.
The writer is non-resident senior fellow,Brookings,and former chief economic advisor,Government of India